India Inc expects lending rate cuts, boost to demand

The Reserve Bank of India’s (RBI’s) decision to cut its key rates — repo as well as reverse repo — has renewed India Inc’s hope of fresh round of lending rate cuts by banks. Industry hopes this will spur demand from consumers, at least in interest rate-sensitive sectors such as automobile, real estate and retail.

Investors expect the stock markets to respond positively in anticipation of lower borrowing cost for companies and a possible revival in demand.

“This move is in the right direction, as financing has been our biggest concern. We hope to see the cut translating into lower finance rates because until that happens, the auto sector will continue to be under pressure,” said Pawan Goenka, president, Mahindra & Mahindra (automotive sector).

Demand for passenger and commercial vehicles has been slowing as economic growth has stalled and access to finance is becoming difficult. Car sales in January dropped by about 7 per cent to 137 ,000 units. “We can expect some cut in lending rates but it won’t be sharp,’’ said Ravi Sood, CFO, Hero Honda. “Private financiers account for only 20-25 per cent of our business while 55-60 per cent comes from public sector banks.’’

“Despite the repo rate cut announced today, I can expect our growth to settle at only 7-9 per cent in the first quarter of the next year,’’ Sood said.

Auto component makers, who have been among the worst hit because of the slump in demand, aren’t as confident. “This is a small welcome step. Banks have started financing and re-financing companies but not consumers the way they used to,’’ said Surinder Kapoor, chairman and managing director, Sona Koyo Steering Systems.

The real estate sector is optimistic of the cut translating into lower lending rates. “We believe the rates will come down and the housing demand will improve. But banks must release this liquidity to the borrowers and not invest back in government securities, which they have done in the past,’’ said Pradeep Jain, chairman, Parsvnath Developers.

Home sales have fallen nearly 70 per cent from last year’s levels as buyers are deferring purchases. Net sales and profits of most real estate companies fell 70-90 per cent in the December quarter. Property developers are cutting prices of properties, which has impacted their margins.

“The government should bring down home loan rates to 6 per cent, only then will the demand get a boost,” said Rohtash Goyal, managing director, Omaxe Ltd. “The government should have brought the repo rate down by 100 basis points and the reverse repo rate by 200 basis points.”

“This will give incentive to commercial banks to lower rates at least for short-term borrowings such as commercial papers. Since we do use short-term borrowings, it will help us,” said Govind Sankaranarayanan, CFO, Tata Capital, the non-banking finance company of the Tata Group.