The Reserve Bank of India’s (RBI’s) move on Tuesday to tighten monetary policy further fuelled fears that rising interest rates will swamp consumer demand and put expansion plans of corporates on hold.
The profit outlook for India Inc, which is already grappling with higher energy and raw material costs, has turned gloomier with the latest spike in interest rates.
The reaction of the market was not surprising. The 30-share benchmark index of the Bombay Stock Exchange, the Sensex, tumbled 558 points, or 3.9 per cent, to close at 13,792 as investors remained jittery over the economy’s future prospects. The 50-share Nifty of the National Stock Exchange slipped 3.3 per cent to close at 4,190.
“Already companies are hit by higher cost of raw materials and energy. Now, they are faced with additional cost of borrowing,” said Ajit Ranade, chief economist, Aditya Birla Group.
A higher repo rate, the rate for short-term loans banks take from the RBI, could result in pushing up the cost of funds for companies looking to borrow.
“Higher interest rates will have a negative effect on the profits of companies with high debts,” said Ramdeo Agrawal, co-founder, Motilal Oswal Financial Services. “However, what could damage corporate profits more is a fall in consumer demand due to high interest rates.”
The Sensex companies saw their interest expenses rise more than 30 per cent through last fiscal year ended March 2008.
“The high interest rate regime may have an impact on our future projects,” said Sheshagiri Rao, chief financial officer, JSW Steel. “We will have to wait for the right market opportunity for funding requirements.” The company is planning to invest over Rs 6,000 crore this year on capacity expansion.
Companies are trying to come to terms with a situation that most feel could continue for at least a few quarters. “The challenge is to balance investment and costs with returns,” said K Chandrasekhar, vice-president (finance and investor relations), Mahindra and Mahindra Ltd.
The automobile industry has had a double whammy as high interest rates have driven many buyers, resulting in sluggish sales in recent months.