The Reserve Bank of India?s (RBI) move to hike the repo rate and the reverse repo rate by 50 bp has surprised the corporate world, who feel that dearer money will impact investment plans. However, many felt its was understandable that the central bank has chosen to attack price rise head-on, and that the willingness to sacrifice near-term growth in order to ensure medium-term sustainability is desirable.
Harsh Pati Singhania, MD of JK Paper, said the hike in policy rates will result in an increase in lending rates by banks, leading to the twin effect of further slowing down capital investments and hiking rates of consumer finance. ?Much of the causes of the inflation are beyond the control of RBI as they are arising from agri-inflation, which requires major reform in agriculture and high global commodity prices including petroleum,? he said.
What is a cause of concern is the impact of high rates over a long period of time. ?Already, interest and lending rates are at their peak, and rates being hiked at this time will impact investment,? says Akshaya Moondra, CFO, Idea Cellular, adding that he was hopeful that these rates would be lowered once inflation is under control. He said that the small and medium scale industry would be most hit by the hike, since most large companies borrow on fixed rate. ?The impact of this in the coming 3-6 months would be negligible. However, if is it for a longer duration like one year or more, then companies will have to bear higher borrowing rates and interest costs would rise.?
Agrees Harsh Goenka, chairman, RPG Enterprises, ?From a corporate point of view, the rate hike will surely lead to concerns on how far it will affect economic growth and investment plans of companies. With money becoming dearer, some plans may even have to be revisited or altered. The growth projection for the year at 8%, lower than the government?s estimate of 9% is also a significant pointer to the shape of things to come.?
Prabal Banerji, CFO of Adani Power, is of the view that there should be an end to the increase in repo and reverse repo rates, since the attempt here is to curtail demand. ?Inflation is also a play of supply side management, and if this is not handled well, can lead to a further slowdown in the industry, as the threat of high oil prices is still looming large,? he said. JK Paper?s Singhania called for debottlenecking the supply side constraints by encouraging investments in order to contain prices. ?Much emphasis will also have to be put on the fiscal side through reduction in subsidies, and health of state finances to keep the deficit in control,? he added.
The auto and realty sector are expected to be impacted, since the rate hike could lead to higher retail loan rates. However, Niranjan Hiranandani, managing director of the Hiranandani Group was of the view that every repo and reverse repo rate hike should not necessarily result in increase in interest rates, as it depends on the liquidity position of each bank. But, according to K Chandrasekar, executive VP, corp finance & investor relations, Mahindra & Mahindra Ltd, corporate and retail loan pricing would bear the brunt of the combined impact of the policy rate hike, the higher capital cost from rate hike on savings deposits and enlarged NPA provisioning. ?Part of the response to increasing capital cost has to come from corporate treasuries ? working capital and cash management, rightsizing and timing market borrowings will be key to soften the impact of loan costs on bottomline,? he said.
He, however, said the highly visible rate action should not take away the importance of other announcements in the policy which deserve kudos ? repo as the single signaling rate, and currency hedging facility for non-resident exporters/importers, which is a timely measure to develop the rupee as a global trade currency and move towards convertibility.