“Something is better than nothing. We need more rate cuts but also need policy initiatives,” Biocon’s Kiran Mazumdar-Shaw paraphrases the collective sentiment from corporate boardrooms, though RBI’s shock therapy — a 50-basis-point reduction in the repo rate, at which banks borrow from RBI, is expected to rekindle some amount of “animal spirit” among industry and investors.
With the cost of capital expected to come down, cash guzzling and capex-heavy sectors are cheering for sure, but they, too, know the impact is limited, as CRR has been left untouched at 4.75 per cent. “For the steel sector, the repo rate cut is significant. When you are setting up mega projects, even a minor change in interest rate is a big help. Also, steel companies have high working capital and this will have a major impact on the bottom line. Overall, it’s feel-good, but ultimately RBI will have to consider a CRR cut to inject liquidity in the system,” says Sushil Maroo, deputy managing director & group CFO, Jindal Steel & Power.
Sanjiv Goenka has gone a step further to spell out the prescription. “A mere 0.5 per cent reduction in repo rate will have to be followed in the next two to three months by further cuts in repo rate, as also CRR to ensure good liquidity,” highlights Goenka, chairman, RP-Sanjiv Goenka Group, with business interests spanning retail to power and carbon black.
Ficci has already sought an additional 100-basis-point cut in rates to spur growth and economic activity.
But for the moment, such a cut has indeed surprised most. CEOs are wary that economic fundamentals may leave less room for flexibility. For the moment, therefore, it’s cautious optimism. “We are not sure if banks will pass on the rate cuts to borrowers immediately. Inflationary pressures have still not abated and it is unlikely this could herald further rate cuts in the future. However, this is the beginning of a trend reversal and a step in the right direction to at least improve sentiments,” Essar’s group CFO, V Ashok, offers his reality check.
Even FMCG-to-real-estate business groups like Godrej whom one would expect to remain somewhat insulated on the back of robust consumption demand versus the stuttering investment demand across manufacturing, are circumspect. “As long as global commodity prices are high, there is not much we can do through monetary policy. The repo rate cut will encourage production and maybe bring down inflation but it will add tremendous value to growth,” feels Adi Godrej, chairman of the Group.
The problem is, as HDFC’s Deepak Parekh puts it, the negativity around the India story is so high that unless the government bites the bullet on controlling its fiscal health, even RBI or any monetary tool cannot do much. For the moment, it has swallowed the bitter pill to push the growth pedal after three long years, but the hopes may soon dim, unless New Delhi smells the coffee. “Is the government a charitable organisation?” he asks, and adds, “We have not been able to pass on the petrol price increases. The fuel and the fertiliser subsidy bill have gone through the roof. But we are unable to take a political decision. I don’t know why?”
The FM and the senior policymakers have said they are ready, giving R V Kanoria, president, Ficci, some hope. “We hope that positive measures will be taken by the government ,which would result in increased liquidity and not crowd out private investment as a result of high government borrowings.” This, in turn, can set the stage for further rate cuts in the near future. “While the cut in policy rates by RBI is an encouraging move, we also need the government to push reforms, as this would improve business sentiment and spur investments in the economy,” he adds.
Infrastructure players agree, saying monetary policy has to be complemented with policy actions and a simple regulatory regime. Also, addressing supply-side constraints can also bring down inflationary pressures. “Any pick-up in investment is now more reliant on easing of policy-related bottlenecks than on reduction in interest rates. To attract investments in infrastructure, transparency and certainty on issues like taxation, land acquisition criteria, environmental clearance norms, are a must. Going forward, I feel fiscal measures should play a more important role than monetary measures,” says Hemant Kanoria, Srei Infrastructure.
Two wheeler makers who also witnessed a perceptible slowdown are equally pragmatic. “This will make a difference to consumers to borrow at a cheaper rate and to OEMs to manufacture at a more efficient, competitive cost. Naturally, it is beneficial to consumers. But is it enough? Certainly not,” quips Sunil Munjal, Joint MD, Hero Moto Corp.
Real estate companies echo that sentiment. “This development will have a positive impact across the economy and particularly in the real-estate industry. Not only will the cost of borrowing rationalize, this reduction will also provide an impetus to growth and enhance business-confidence," feels Ajay Chandra, MD, Unitech Ltd.
So, the India consumption story remains intact, albeit with a few bandages?
Damodar Mall, Director, Future Group breaks it down. “As interest rates go down, service providers like us will benefit with lower cost of funds. For customers it means, tangible reduction in EMIs (equated monthly installments) and psychologically, a sense of well being, that he or she has more cash and it is a good signal.