 "Consumer demand to get a boost")
The Reserve Bank of India (RBI)'s decision to cut its key policy rate by a surprising 50 basis points (bps) will help boost sales of automobiles and consumer durables. However, it is not enough incentive for companies to press the pedal on big-size investment in infrastructure or manufacturing, say chief executives (CEOs).
They said cheaper loans would encourage people to buy cars and two-wheelers, after muted consumer confidence in recent months. "A 50 bps cut is the right signal to the markets and to consumers and should boost consumption," Anand Mahindra, chairman of automobile major Mahindra & Mahindra, tweeted.
CEOs said a rate cut was overdue, with the fall in inflation rates. "It is better late than never. Hopefully, the rate cut will also bring down the cost of borrowing for customers, so more will buy. It will definitely give a big fillip to investors' confidence," said Venu Srinivasan, chairman and managing director of Chennai-based two-wheeler maker TVS Motor Company.
Consumer goods maker Dabur India's CEO Sunil Duggal is also among the happier lot. "The cut will boost demand as we go into the festive season. So, an impact on festive sales will be there. More important, the cut will give a fillip to the feel-good factor or sentiment, which is missing in the marketplace."
So, Sunil Kataria, business head, India & Saarc, Godrej Consumer Products. "A 50-bp cut was more than what we expected," he says. "There will be a trickle-down effect because there will be a clear impact on EMIs (equated monthly instalments) as far as home and car loans go. Lower EMIs will mean that income in the hands of consumers will grow. This will spur demand for consumer goods. I see this happening not immediately but in three to six months."
The management of India's top two-wheeler maker, Hero MotoCorp, also sounded positive. "The rate cut has happened at a very opportune time, just before the festive season. It will impact sentiments positively," said Ashok Bhasin, head of sales, marketing and customer care. It had also launched two new scooter brands on Tuesday, to cash on festival demand.
The extent of the rate cut has also been a pleasant surprise, as the majority was expecting only a 25-bp cut. "Fifty bps is a big surprise and shows the will and direction of RBI. This will certainly boost our festival sales and give impetus to economic growth," said V N Dhoot, chairman of Videocon Industries.
So, consumer product companies were pleased that demand would pick up. However, CEOs of large companies said they'd wait for more economic reforms to revive capital expenditure, down sharply in the past three years. "While the rate cut will help spur growth, to get the economy back on track, the reforms process will have to move in tandem," said Harsh Mariwala, chairman of Marico. "Implementation of the Goods and Service Tax (GST) Bill will help stimulate long-term growth."
Others said the rate cut by itself wasn't enough. "It's very positive for the corporate sector and will give relief to a lot of companies which are facing headwinds. But, for big-ticket investments, this cut is still not enough for a boom in the investment climate or investment process. I believe the major step has to come from public sector undertakings' investment in infrastructure, which will really turn the investment climate positive," said Prabal Banerjee, head of international finance for the Bajaj group.
Some top CEOs, though, sounded more hopeful than others. "Governor Rajan's long-awaited decision is very welcome news. Banks should rise to the occasion and reciprocate by passing on the relief. I am hopeful that the investment cycle will get a much needed boost and spur economic activity if the cascading takes place in full measure," said Harsh Goenka, chairman of RPG Enterprises.
A reduction in interest rate will make some difference to surplus cash availability of any major company and will reduce the interest cost to an extent. But, that will not make any major difference for investment decisions or any major change in profitability or viability of new projects, says Banerjee of the Bajaj group.
High finance costs, coupled with a slowing in the economy, had led to many top companies, especially in infrastructure and commodities, making huge losses. For instance, Hindalco, the Adani power companies and Reliance Gas had to resort to RBI's '5/25' scheme to restructure their loans and delay repayments.
In spite of the rate cut, the diversified manufacturing sector, where capacity utilisation has fallen by 20 per cent from an earlier peak, might not see meaningful capital expenditure spending in the next 24 months barring that for maintenance, warn analysts. Nevertheless, it is a good move and should at least reflect in higher consumption demand. Which, if it takes place, should provide confidence to companies to invest in new capacities.
"On a long-term basis, I am hoping the rate cut kicks off a virtuous cycle. Monetary policy and its transmission at the end of the day is part of that task. It fuels demand, yes. But ,for long-term investment and growth, reforms are a must," said Duggal.
| TALKING HEADS |
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With CPI and WPI numbers within comfort zone and industrial growth not picking up, RBI's 50 bps cut in policy rate is a decisive pro-growth move and is welcomed”
Sunil Kanoria Vice-chairman, Srei Infrastructure Finance Ltd |
Governor Rajan's rate cut is the silver bullet we have been waiting for to give momentum to investment activity. It is an opportune time to propel the investment cycle and get India moving forward”
Harsh Goenka
Chairman, RPG Enterprises
Chairman, RPG Enterprises
It is better late than never. Hopefully, the rate cut will bring the cost of borrowing down for customers also, so more customers will buy. It will definitely give big fillip to investor confidence”
Venu Srinivasan
CMD, TVS Motor
CMD, TVS Motor
