India Inc not happy with status quo on rates

Most of CFOs, CEOs say they were expecting some relief on interest rate front

For corporate India, the RBI’s policy today to keep interest rates unchanged means hard days ahead with a substantial slowdown in fresh investments and a decline in demand for rate sensitive products such as real estate and auto.

CFOs say if banks are borrowing at more than 10% from marginal standing facility of the RBI and have already borrowed more than Rs 26,000 crore then they will on lend to corporates at a much higher rate.

“I suspect RBI does not have very many options open to them and hence there is no point in speculating over it Let's gear up to that and look at our business models and financial models more closely,” says Prabal Banerjee, President - International Finance of Essar Group.

Most of the CFOs and CEOs say they were expecting some relief from the RBI on the interest rate front but with rupee falling versus the US dollar, the RBI had little space to bring down the rates. “It was expected that the RBI will not cut rates so we are not surprised,” said a CEO of a large infrastructure firm.

The CFOs say liquidity squeeze by the RBI is not being effective and even the second monetary tool of interest rate hike also is becoming not so effective today as soon after the RBI policy today, the Indian currency depreciated rapidly.

“I am inclined to draw the conclusion that monetary tools are gradually losing their relevance for controlling Indian currency depreciation though they are still relevant for controlling inflation directly. We need to understand that with marginal standing facility costing banks at 10.25%, already the interest rate is at higher rate than the reverse repo rate for the banks,” says Banerjee.

“I firmly believe that till the balance of trade issues finally resolved, this rupee depreciation issue will not get resolved. Hence, the focus should be correcting trade balances and ensure that the capital account deficit is under control and that's the only way to stem  Indian currency depreciation apart from capital inflows,” says he.

The RBI move to keep rates unchanged is bad news for those companies which have a very high debt and low profitability like Adani group, Essar and Jaypee group companies.