India Inc wants banks to pass on benefits of earlier rate cuts

Although the Reserve Bank of India (RBI) disappointed Indian companies by not cutting interest rates, CEOs said it's time for the banks to pass on the rate cuts announced by RBI earlier to their customers. Till date, banks have passed on only half of the 150 basis points (bps) rate cuts announced by RBI since January 2015, which is discouraging companies from investing in new projects. CEOs said they expect another 25 bps rate cut by August this year when there will be more clarity on monsoon rains.

Marico Chairman, Harsh Mariwala said the status quo on rates is not surprising and is on expected line keeping in mind the inflation and other indicators. "But I do expect rates to come down by August when there is more clarity on rain," said he.

CEOs expected a 25-bp rate cut in the monetary policy review as that would have given further momentum to economic growth, which is beginning to pick up pace and becoming broad based. "However, as evident from the policy document, even as the RBI has noted the uneven yet firming recovery, it is clearly more concerned about the sharper-than-anticipated upsurge in inflationary pressures in the economy," said Rajeev Talwar, CEO of real estate major, DLF.

"At this time, when credit demand is still flat and industry is facing a demand crunch, a rate cut would have done much to restore the investment cycle. We are hopeful that RBI will resume the rate cutting cycle and support growth impulses in the economy in the next monetary policy," said Chandrajit Banerjee, director-general, Confederation of Indian Industry.

"We do hope that continuous focus of the central bank on improving the transmission of the previous rate cuts into lower lending rates would yield effective results and that we will see a greater pass through going ahead," said Harshavardhan Neotia, President of Ficci.

According to RBI, the March quarter earnings suggest double-digit growth in earnings before interest, taxes, depreciation and amortisaiton (Ebitda) levels for non-financial companies. "The Reserve Bank's latest rounds of forward-looking surveys indicate an improvement in the overall business situation, driven by a pick-up in capacity utilisation and in order books - both domestic and external. These developments have improved the expectation of business conditions in the first half of 2016-17," RBI said.

"The corporate performance is showing improvement and at this juncture, when he (RBI governor Raghuram Rajan) is not very sure whether he will stay in second term, the best bet for him would be not to disturb the apple cart. In case he reduces the repo rate and inflation goes up, which it will in any case, then fingers may be raised at RBI," said Prabal Banerjee, president (international finance) at the Bajaj group.

The CEOs said although the business conditions are improving, it is not seen across all sectors. The infrastructure, steel and metal sectors are still facing the slowdown and it would take some more time for these sectors to see a turnaround.

According to RBI, many indicators in April point to a firming recovery. "Leading the upturn are cargo traffic at major ports, two-wheeler and three-wheeler sales, commercial vehicle sales, passenger air and freight traffic, cement production, and steel consumption. Abstracting from seasonal effects, this suggests that the expansion, especially in the services sector, is getting broad-based," RBI said. On the other hand, railway freight traffic and passenger car sales have decelerated on sector-specific constraints.