RBI?s decision to effect a change in key rates comes as a blow for manufacturers and may affect their capital expenditure plans and funding. The manufacturing sector, already facing a slowdown threat, will be hit hard due to lack of liquidity and credit in the market and high interest rates; input costs are expected to rise even as demand slows down, eating into their profit margins.
RBI had increased the repo rate by 50 bps on Tuesday with a 50-point hike in CRR to be effected in two instalments in July, to check inflation. Subsequently banks, led by SBI, also hiked prime lending rates.
Most corporate leaders feel that with consumption set to go down, corporate growth or expansion plans will have to wait. Says JK Cement CFO AK Sarogi, ?We have to see how it goes. There will be some impact like increase in interest rates, but projects will not be impacted as they are planned for the long term.? However, companies will now have to be cautious of reckless capacity building.
The cement sector has been becoming extremely competitive with many foreign players making a beeline for India, which is seeing a lot of activity in the infrastructure.
?Corporates will now have to be cautious before starting new projects and see to it that the supply-demand scenario is matching, as this will show on their profitability,? says Asit Bhatia, managing director, Global Corporate and Investment Banking Group-India, Bank of America.
Experts expect the auto industry, which requires high capital-intensive investments, to be affected too. Says Vaishali Jajoo, an automobile and transportation analyst with Angel Broking, the RBI move will definitely have an additional cost burden on the manufacturers and affect their capital expenditure plans and funding. ?Though major manufacturers, including Tata Motors, have already announced their fund raising plans, there has been no communication from the companies after the RBI announcement. For short-term capital, the companies will have to look towards the money market. However, for long-term, they will look at alternative ways of fund raising,? she says.
The situation also means companies have to come up with new ways of absorbing costs. Samak Ghosh, president (corporate finance and development banking), Yes Bank, says companies will now have to launch innovative measures to absorb prices so that they pass on only the minimum hike to consumers. ?Prices of food products, especially, should not be hiked further,? he feels.
The real estate segment is also likely to be hit, but some players are putting up a brave front. Ramashrya Yadav, head (finance & strategies), Orbit Corporation Ltd, says rising inflation is good news for the real estate market as developers will now look at entering into new land deals with 20% to 25% discounted prices. ?We too plan to implement a similar initiative as well. Owing to rising steel prices and cost of construction recently, we had to sell off some of our land. But now we are planning to buy the same land at 25% discounted rates. So, we are ultimately gaining,? he adds.
GMR group chairman GM Rao feels the rising inflation is an added burden to the overall economy, specifically real estate as the sector is already reeling under high cost of construction due to rise in steel prices. ?But a price correction is expected soon and this should help developers in generating supply for affordable homes,? Rao adds.