MUMBAI: The Reserve Bank of India (RBI)'s raising of the repo rate (at which it lends to banks for the short term) by 0.25 basis points is aimed to control rising prices rather than to encourage economic growth, say chief executives (CEOs) of companies.
They were not expecting RBI to cut rates but presumed these would not be changed. But a rise, a surprised corporate India says, will increase finance cost for all companies, especially for the highly leveraged infrastructure and real estate entities.
CEOs say this might be the final rise in rates. "We are expecting the interest rate cycle to reverse by next financial year (2014-15), when inflation comes under control," says Seshagiri Rao, joint managing director of JSW Steel.
Others say RBI is on the right track, for controlling inflation. "The 0.25 per cent repo rate hike will not make much difference to Indian corporates anyway, unless they are highly leveraged," says Prabal Banerjee, president, international finance, Essar group. "Indian money has always been expensive and a marginal increase will not deter corporates from accessing that money if they need it, as in the overall impact, as a percentage of revenue, such an increase is marginal," says Banerjee.
CEOs of infrastructure firms say the need of the hour is not lower interest rates but faster clearances of projects.
With interest rates in India rising, many big companies, such as the Reliance and Essar groups, are raising low-cost funds from abroad to fund projects and swap high-cost local loans with dollar loans. "The idea is to take advantage of lower rates abroad and insulate the companies from volatility in the interest rates in India," says the chief financial officer (CFO) of a construction major.
Some CFOs say once inflation is under control, RBI can tackle the growth issue on a much wider base.
Realty developers say the central bank's move will hit property sales, as the sector is already battling declining home sales. Brotin Banerjee, managing director and chief executive, Tata Housing, said: "Higher interest rates, an outcome of the third-quarter policy review, will affect investment in the realty sector. Demand for housing has already been sluggish…the RBI move is likely to make matters more difficult for an industry."
Said Pradeep Jain, chairman of Parsvnath Developers: "It's a disappointing step by RBI…The manufacturing and construction sectors are struggling hard to move on….I am afraid this hike will demoralise home buyers who already prefer fence-sitting due to the unstable political environment…We were actually expecting a rate cut from the apex bank."
Some such as Kamal Taneja, managing director of TDI Infracorp, said the RBI action would make corporate and retail loans more expensive.
Samantak Das, chief economist and director (research), Knight Frank, said in all likelihood, the rate rise would be the end of RBI's monetary tightening process this financial year. "However, the rate hike will throw an adverse signal to the real estate market in the short term," he said.
Industry chambers said the monetary policy statement had disappointed industry. "Growth has been anaemic and investments have been hit hard over the last two years. There are clear signs of contraction in employment opportunities across industries," said the Federation of Indian Chambers of Commerce and Industry. "At a time when factory production is in negative terrain, industry needs policy support from all directions."
The Confederation of Indian Industry said, "This is an opportune time to accord precedence to growth over inflation, especially as prices are trending downwards, core inflation is within the comfort zone of RBI and inflationary expectations are not unduly high in view of a robust performance by the agriculture sector."