MUMBAI: The Reserve Bank of India's move to increase repo rate by 0.25 basis points is aimed to control rising prices rather than encouraging economic growth, say CEOs.
Indian companies were not expecting the RBI to slash rates but were betting that the RBI to maintain the rates at the same level. But a hike, surprised corporate India says will increase finance cost for all companies especially for the highly leveraged infrastructure companies and real estate players.
CEOs say this may be the last hike in the interest rates. “We are expecting the interest rate cycle to reverse by next fiscal (FY2015) when the inflation comes under control,” says Seshagiri Rao, Joint MD and CEO of JSW Steel.
Others say the RBI is on the right track to control inflation. “The 0.25% repo rate hike will not make much difference to Indian corporates anyway unless they are highly leveraged," says Prabal Banerjee, president - international finance of the Essar group.
CEOs of infrastructure firms say very few companies are investing in new capacities and till elections are over, they are not contemplating investing in new projects. The need of the hour is not lower interest rates but faster clearances of projects by both the state and the central government, they say.
With interest rates in India rising, most of the top corporates like Reliance and Essar group are already raising low cost funds from abroad to fund projects and to 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 CFO of a construction major asking not to be quoted.
CFOs say once inflation is under control, the RBI can then tackle the growth issue subsequently on a much wider base -- and such growth will come on a sustainable basis.
“Market buzz is that interest rate increase will make resource mobilisation in India more costly and difficult also has to be seen in different perspective. Indian money has always been expensive and marginal increase will not deter Indian corporates to access that money if they needed it as overall impact as percentage of revenue -- such increase is marginal. And in any case, most of Indian corporates today are looking at international loan market and bond market for their growth capital,” says Banerjee.
Corporate lobby groups said the monetary policy statement of the RBI has disappointed the industry. “Growth has been anaemic and investments have been hit hard over the last two years and there are clear signs of contraction in employment opportunities across industries," the Ficci said in a statement.
“At a time when the factory production is in the negative terrain, the industry needs policy support from all directions to get the sector back on track,” the chamber said.
The Confederation of Indian Industry said its time for the central bank to focus on boosting investments and economic growth rather than containing inflation.
"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 the RBI and inflationary expectations are not unduly high in view of a robust performance
by the agriculture sector," it added.