Thirteen rate increases, a falling rupee, policy paralysis and global volatility. India Inc has little reason to enjoy the festivities this season, but can only grin and bear it. Even though the repo rate raise on Tuesday has been on expected lines, the policy has been a mixed bag for most. The Reserve Bank of India’s (RBI) signal of a likely pause in further rate increases on growth related concerns will bring some cheer but a depreciating rupee is likely to negate much of the upside.
“I think we have endured most of the pain and it should get better from here. I don’t see further spikes in rates for the short term. But the RBI should, and my guess is, it will focus on the currency, as that is another form of inflation that is hitting us and impacting the already subdued investment momentum,” said R Shankar Raman, Chief Financial Officer, L&T. Infact, currency management is on top of India Inc’s need-to-fix list. “A weak rupee in an high inflation situation is proving to be extremely detrimental,” said Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII). Therefore, according to Ficci’s secretary general Rajiv Kumar, “a clearer statement on preventing a rapid depreciation of the rupee by the Governor would have been specially welcome.”
There is a general acknowledgement of RBI gradually backing off and on the fact that there has to be a greater emphasis on encouraging investments and a clarity on key policy matters that have been on hanging for, far too long.
“Structural imbalances in agriculture, infrastructure capacity bottlenecks, distorted administered prices of several key commodities and pace of fiscal consolidation has left little room for the RBI but to increase interest rates. We believe, these issues need to be addressed by the government promptly,” pointed out Dilip Modi, President of Assocham.
Many senior corporate captains echo the sentiment. “We have been trying to contain inflation but at the cost of growth. But even after 13 hikes, we are yet to see a significant moderation of inflation. Today the confidence level in India is really low. Various domestic factors is effecting sentiment,” observes Sheshagiri Rao, Group CFO, JSW.
A balance between growth and inflation is what most is craving for. “ If the purpose is to control inflation, it cannot be at the cost of economy. It is a fact that a runaway inflation will have bigger and serious implications. But if there is a constant capital constrain than the ability for the corporates to invest back and create jobs will be impacted. Even for a country like India that was expected to grow at 8 per cent a drop to 7.6 per cent is a serious matter,” said Ganesh Natrajan, Vice Chairman and CEO, Zensar Technologies.
Interest rate sensitive sectors like auto and real estate have seen demand slackening for the last few months. So any rate hike translating to a similar upward revision in lending rates affect buyers sentiments. Auto sector growth forecast has already been brought down by SIAM to a meagre 2-4 percent and industry players are feeling the pinch.
It’s a clear urban versus rural divide for sectors like two wheelers. Extra income in rural households has ensured a buoyant demand, but a slowdown in urban centres is quite imminent and that in the long run will be a drag. “My fear is that companies will seriously look at holding back capacity addition plans and in some industries it has already got delayed. New projects may be deemed unviable. As far as the two-wheeler market is concerned, which derives about 45-50 per cent of its sales from the rural market, demand is largely expected to stay insulated from the slowdown seen in the urban market. About 70 per cent of sales on Tuesday is done on cash basis in the two-wheeler sector where the ticket size of the product is quiet small compared to something like purchase of a car,” elaborates Ravi Sood, CFO, Hero MotoCorp.
Real estate players have so far been worst hit by RBI’s continuous belt tightening but this time around they see a silver lining in RBI’s decision to indicate a pause in further hikes anytime soon. “RBI is giving a kind of assurance. For existing borrowers, rates can only come down from here. For new borrowers, the overall interest rates will come down in the next 3-4 years,” felt JC Sharma, managing director, Sobha Developers. Most players also feel that’s high time the policy makers focus on increasing the housing stock in the country and weed out other supply side handicaps.
“Inflation is not going to come down by increasing interest rates. It will come down by increasing the supply in the housing and other sectors. RBI is going on with the same remedy over and again. It is definitely impacting growth. In real estate, projects are still coming up and are at varous stages of execution. But these hikes are majorly hitting the new buyers,” said Rajeev Talwar, executive director, DLF Ltd.