High interest rates, slowdown hit funding in Apr-Sep

Following a high interest rate regime and moderating economic growth, the fresh and incremental funding dipped 8 per cent to Rs 4,22, 000 crore in the April-September quarter this year. Funding was Rs 4,61,000 crore in the same period last year, according to rating agency CARE.

Madan Sabnavis, chief economist at CARE, said indications are Reserve Bank of India’s (RBI) purpose to chuck off fund supply to manage inflation expectation is being met. Dip in inflows is a serious concern as it indicates lower level of economic activity including investment.

As long as RBI continues with interest rate increases, the overall investment environment is expected to remain subdued between October 2011 and April 2012, he added.

The fresh and incremental funding includes resources raised through external commercial borrowings (ECBs), equity and debt.

Referring to capital market action (debt and equity), CARE said debt and equity issuances moderated during April-September 2011 by 27 per cent and 67 per cent, respectively, over the same period last year.

The share of financial services companies was highest in this market and accounted for 71.6 per cent of the total fresh issuances (debt) during April-September followed by services sector with 11.7 per cent.

The share of the manufacturing sector was 9.5 per cent in April-September as against 19 per cent raised in the same period last financial year.

On favourable overseas environment to raise cheap funds, it said the differential between rates in India and Euro markets had widened. RBI’s series of policy rate increases pushed market rates up and those in the western markets being stable in the downward direction. This made ECBs an attractive option even after adjusting for country rating and exchange risk.

A stable rupee which tended towards appreciation during the start of the year, supported by RBI’s affirmative action for firms seeking to raise funds, has made this source more attractive. Indian companies raised $16 billion through ECB route during the April-August 2011.

But sharp depreciation of the rupee since the beginning of August and high volatility has changed the market conditions. Going forward, rupee volatility can lower the relative attractiveness of the ECB route, CARE added.