While the Reserve Bank of India hopes to bring inflation under control with Wednesday’s 35-basis point hike in the repo rate, top executives from the corporate sector believe this will put pressure on new demand creation, increase funding cost and subdue buyer sentiments.
The central bank has hiked the repo rate five times in eight months this year, pushing it to its highest level since August 2018. It has also guided for continuation of its efforts to tame inflation, thereby raising possibilities of further hikes in the near future.
Shankar Raman, whole-time director and chief financial officer, Larsen & Toubro (L&T) told FE, “The rate hike is on expected lines. While this could increase the funding cost at the shorter end of debt tenor, the offsetting benefit in the form of contained inflation lends credence to this effort. We hope we are at the end of the rate hike cycle. Impact of these moves on inflation and currency markets will be watched closely.”
Besides having an impact on fund raising, the rate hike is expected to put some degree of strain on automotive demand which has had an unrestrained run since the past few quarters.
Shashank Srivastava, senior executive officer, marketing and sales, Maruti Suzuki, said, “We have had a steep increase in the repo rate since May but so far there hasn’t been any visible impact of it on retail demand. About 80% of the retail happens through financing while wholesales are almost 90%. The increase in rates would have an adverse impact on the automobile sector.”
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While the hike will increase the equated monthly instalments (EMIs) of borrowers, it will dampen buyer sentiments in the short run.
“There are buyers who have a home loan to service. The EMIs on home loans will also go up and that is where you have the sentiments getting impacted. All purchases on loans will get hit,” Srivastava added.
Excluding the commercial vehicle segment, the automotive industry has seen a 26% growth in domestic sales during the April-October period, according to data supplied by the Society of Indian Automobile Manufacturers.
Niranjan Hiranandani, Managing Director, Hiranandani Group said, “The prolonged rate hike still remains in the low regime of interest rate zone. Floating home loans may hurt temporarily, but in the long term, it averages out positively. The property market may experience a lag in sales to accommodate rising EMI payouts and simultaneously evaluate postponement options for a stipulated period of time. Until now, the rising cost of borrowing for both individuals and corporates were well accommodated, but any further hike will dent the consumption sentiment.”
The Confederation of Indian Industry (CII) had earlier urged the central bank to consider moderating the pace of rate hikes. The apex chamber mentioned that 2,000-odd companies faced moderation in both the top-line and bottom-line front during September 2022 quarter on a sequentially and annual basis — indicating the need to abate monetary policy tightening.
CII stated that domestic demand is recovering well as mirrored by the performance of a host of high-frequency indicators. However, the prevailing global ‘polycrisis’ is likely to impinge on India’s growth prospects too. Further, the industry body stated that on the back of the headwinds to domestic growth mainly emanating from global uncertainties, the central bank should consider moderating the pace of its monetary tightening.
RBI began the rate hike cycle in an unscheduled policy meeting in May. The Russia-Ukraine war that commenced in February led the global economy to witness inflationary pressures, soaring crude oil prices, energy crises, supply-chain disruption, and steep correction in reserves among others. From May to date, RBI has made five consecutive rate hikes.