RBI move to hit corporate profits

With the Reserve Bank of India planning to suck out liquidity from the system, the worst fears of the Indian corporate sector have come true.

The consensus is that a high interest rate regime, now a certainty, will increase costs, slow down demand and hit profitability.

CEOs said margins were already under substantial pressure due to high energy prices. The only way to survive in this scenario is to cut costs, put brakes on new expansion plans and increase efficiencies.

Venugopal Dhoot, chairman, Videocon group, said this will hurt the industry's expansion plans and economic growth would further slow down. He, however, felt India Inc's global acquisition plans will continue as they raise funds mainly from abroad.

"There was no choice before the RBI. This step is aimed at controlling inflation. But it will have a negative impact on industry. Lending rates will now go up, because of which capital expenditure will take a back seat," he said.

Other CEOs agreed. Seshagiri Rao, Director Finance of Jindal Steel, said he expects interest costs to go up by 0.5 to 1 per cent. While the company's capex plans will not be affected as the funds for this have already been tied up, the impact on working capital requirements will be substantial.

Jindal Steel requires Rs 3,500 crore (Rs 35 billion) working capital annually and 20 to 30 per cent of this is borrowed from banks. "We have to reduce costs and increase efficiencies to protect our margins," Rao said.

Analysts said the automobile sector, particularly the two-wheeler segment, will see a significant demand slowdown.

Ravi Sud, chief financial officer, Hero Honda Motors, said "It is a huge negative for the two-wheeler industry. The expansion plans across sectors will get hit due to the rate hike. The two-wheeler industry depends heavily on credit availability with almost 60 per cent purchases being financed."

Echoing a similar view, A L Kapur, managing director, Ambuja Cements, said: "This will affect the cement industry as much as it will affect any other sector. Liquidity is being sucked out from the system and it would be builders and real estate developers who will feel the pain.

Bharat Banka, head of finance of the Aditya Birla group, said liquidity is still not a problem for top-rated firms but expansion plans can still be hit if interest rates continue to rise.

Mohandas Pai, director - HR of Infosys, said every 100 basis points rise in interest rate affects aggregate corporate profits by Rs 25,000 crore (Rs 250 billion).

"India Inc has tough days ahead with consumption sure to go down," Pai said.

He said while companies will go ahead with their existing expansion plans, they will be cautious of announcing new projects, with oil prices already going through the roof.

The unbridled salary rise will also take a hard knock, Pai said, as employees will be realistic in their expectations. N K Jain, vice chairman, JSW Energy, said growth plans will now have to wait and many firms will restrict expansion plans.