Rate cut not enough to revive investments

Indian companies, which are facing the double whammy of high interest rates and stalled projects, say the 0.25 per cent rate cut announced by the Reserve Bank of India on Friday is not enough and will hardly make any difference to revive investments.

On the ground, the symbolic 25 basis points (bps) cut in the repo rate is not going to translate into any reduction in the financing costs for companies as many large infrastructure projects across the country are stuck. "The interest costs for companies will continue to remain high and there is no trigger to re-start investments," said Rajkumar Dhoot, director of Videocon.

"But at least the governor has started the ball rolling and we hope that by next policy, RBI will bring the rates down by another 0.5 per cent," he said.

In an alarming report, the CMIE's report for March indicates new capital expenditure investment have continued to decline.

The average quarterly rate (of the last four quarters) of new investment of Rs 1,31,527 crore was down 57 per cent on a year-on year basis and down 31 per cent on a quarter-by-quarter basis. On a quarterly basis, this was the lowest since June 2005.

Both private and government capital expenditure have remained subdued - with private capital expenditure falling significantly. Stalled projects continue to remain high at six per cent of the number of outstanding projects.

No wonder, then, that the financial performance of the fourth quarter ending March reflects the poor performance of corporate sector. The sales of cars, two-wheelers and new home sales are also on the decline due to high interest rates.

Prabal Banerji, CFO of Adani Power, said: "RBI is calibrating its monetary policy very well. They cannot look at interest rate reduction in isolation and being completely oblivious of its impact on economy of a more important parameter like Inflation."

Hence, RBI is not inclined to go for aggressive rate cuts as it is apprehensive about its greater negative impact on economy even though there is demand to reduce cash reserve ratio, said Banerji.

According to corporate leaders, the industrial growth is really slowing and has not yet bottomed out. There has also not been much improvement in the credit disbursal to the industrial sector.

"The cut in the repo rate will give the right signal to the members of India Inc. Going ahead, it will be important to continue with this stance at least over the next quarter", said Naina Lal Kidwai, country head of HSBC and president of the Federation of Indian Chambers of Commerce and Industry.

The good news for corporate India is that the headline inflation numbers at this stage show clear signs of softening and a sharp dip has been reported in core inflation numbers as well.

Besides, according to RBI's Macroeconomic and Monetary Developments Report released on Thursday, headline inflation is likely to remain range-bound in 2013-14, with some further moderation in the first half due to subdued producers' pricing power and falling global commodity prices. This decision is, therefore, very timely.

V Balakrishnan, member of the board, Infosys said: "The RBI is trying to do its bit by a token cut of 25 basis points in repo rates. Frankly, RBI has very limited options in front of them. Even in near future we may see RBI cutting interest rates by another 25 basis points. I also agree with the RBI view of an upside risk to inflation, especially if the currency continues to depreciate, which will have an impact on oil prices."

The solution to India's growth lies in the doors of the government, which requires speedy reforms and project clearances, fiscal prudence and more liberalisation to attract foreign direct investments into the country. The fiscal and monetary authorities need to work in tandem for the country to get back on the growth path, he said.