The Reserve Bank of India's 12th rate hike on Friday has evoked sharp reactions from Corporate India. Companies from auto to real estate, infrastructure and fast moving consumer goods have expressed their angst at the central bank's 25 basis point hike. Most have described the move as being detrimental to the growth of the economy.
Says Harsh Mariwala, chairman & managing director, Marico, also the president of Federation of Indian Chambers of Commerce and Industry (Ficci), "This is not the way forward. I think supply-side bottlenecks have to be tackled aggressively. I don't think inflation can be tamed using monetary policy alone."
Adi Godrej" height="83" alt="Adi Godrej" hspace="5" width="68" align="left" src="/newsimgfiles/2011/september/17092011/091711_08.jpg" />Adi Godrej, Chairman of the Godrej Group says, "This policy of hiking rates has simply not worked. I think the rupee should not be allowed to depreciate. That adds to inflation."
H M Bharuka, managing director of Kansai Nerolac Paints, too, has expressed disappointment with Friday's hike. "I don't think we can allow growth to slow down. It has serious repercussions for us as well as the economy because capital inflows will slowdown and so will investment. As a company, we are seeing a slowdown in housing, auto and infrastructure. With further rate hikes, this will only get worse."
In the past 18 months, home loan rates have gone up by three-four per cent. Add to this persistent food inflation and consumers have been struggling to carry this weight, reason experts. "Clearly, consumers are under pressure," says R R Singh, Director General National Real Estate Development Council, an apex body of developers.
B Muthuraman" height="83" alt="B Muthuraman" hspace="5" width="68" align="left" src="/newsimgfiles/2011/september/17092011/091711_09.jpg" />No wonder B Muthuraman, vice-chairman of Tata Steel, who is also the president of the Confederation of Indian Industry (CII) has sounded a note of caution following RBI's move on Friday. He says, "At a time when economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase. Going by earlier experiences of a policy induced slowdown, it may be difficult to emerge from such a phase. In that case, GDP growth of 8 per cent may not be achievable not only in the current year but also in the forthcoming year. This makes the Planning Commission’s target of achieving an average of 9 per cent growth during the 12th Five Year Plan look increasingly difficult."
Says V Ashok, group CFO of Essar, " The continuous hike in cost of borrowing is beginning to affect profitability, investment and growth as evidenced by the recent IIP numbers. The uncertain global economic scenario has already affected raising of capital and the macro business outlook. All this will be reflected in the next financial year." Hemant Kanoria, CMD of Srei Infrastructure Finance says, "Monetary policy has its limitations in terms of containing inflation. There is an urgent need for fiscal measures to address these issues by scaling up capacity in infrastructure sectors. But if rates keep on increasing, it will adversely impact investments in infrastructure."
The 25 bps rate hike, according to a new ICICI Securities report, will aggravate the economics of over-levered firms. Sectors like real estate, power, airlines and ports are likely to see the maximum impact. Large caps, mostly from less risky sectors, have fared much better with operating revenues growth outpacing growth in interest expenses by 16 per cent. For mid-caps, interest expenses and operating revenues have grown in tandem notching over 145 per cent growth. Small caps have been the worst effected, with growth in interest expense outpacing growth in operating revenue by 25 per cent.
Rostow Ravanan, CFO of MindTree, acknowledged that the RBI faced a "very difficult situation" but added that "there is a lack of coordination between the fiscal and monetary policy.
"It seems like the RBI and the Government are working independently. I do not think that this will impact corporates. Simply because companies with good record can raise funds from outside at attractive rates. The only concern from these rate hikes will be the increase in pressure on retail borrowers. That in turn might have impact on downstream consumption," he said.
Incidentally, a study by Business Standard Research Bureau of 681 companies revealed that the interest cost as a percentage of total debt (over Rs 50 crore each) had remained below six per cent over the past five years.
Industry associations too criticised the central bank’s action. Chandrajit Banerjee, director general of the Confederation of Indian Industry, said in the light of growth slowing down, there was a need for “urgent action” to step up the growth momentum, especially in the manufacturing sector.