- The Indian corporate sector has been enjoying low interest loans for nearly four years now, but that will soon change.
- The Indian central bank announced two interest rate hikes – the first after 2018, as it seeks to control inflation.
- As a result, banks have already increased interest rates on loans, and this could spell trouble for the Ambanis, Tatas, Birlas and Adanis of India.
The low interest rates regime is over and India’s central bank couldn’t have said it any clearer after announcing two rate hikes within a month. ‘Globalised’ inflation, as RBI governor Shaktikanta Das called it, has snowballed into a major crisis, forcing central banks around the world to prioritise inflation control over growth.
That could play a big spoilsport for companies which have piled on huge debts —- which includes all the top business houses of India, that have been betting on growth both organically and inorganically.
For nearly four years, the Reserve Bank of India did not hike interest rates, but the Russia-Ukraine war and the subsequent sanctions imposed on Russia by the West have spiked prices of crude oil, food and other commodities.
While there are plenty of companies in India with no or low debt – some examples include giants like Maruti Suzuki and TVS Motor, apart from Bayer Cropscience, Bharat Electronics, among others – most of the prominent business houses of India have taken on a considerable amount of debt.
Here are the borrowings of some of the major business houses in India:
Source: Company reports, data as of March, 2022.
Notably, companies engaged in the IT sector usually have no or low debt, while those in the infrastructure and other capital intensive sectors have piled on a huge amount of debt.
For instance,
External commercial borrowings, or ECBs, fell by a third due to Covid, but they are picking up pace again.
With the Indian central bank hiking rates twice in a month, companies may be enticed to borrow from foreign lenders.
Mukesh
ECBs are a cheap source of funds, allowing Indian companies to tap into the foreign markets with cheaper interest rates to fund their working capital, capital expenditure, expansion or other funding requirements.
Going the ECB route allows companies to lower their overall cost of debt, which plays a critical role in an entity’s financial performance.
With interest rates surging in India, companies could use ECBs to refinance their debt and reduce their interest expenses.
Repo rate is the rate at which the Reserve Bank of India lends money to banks. A hike in repo rate increases the cost of borrowing for banks, which in turn is passed on to borrowers like you, I and even corporations.
When money becomes costlier to borrow, consumers and businesses curtail spending, thereby bringing down demand and subsequently, inflation.
A side effect of this is that businesses will have less money at their disposal, which could have an impact on their growth, and adversely affect the overall growth of the economy.
Banks across the board have already increased their lending rates. For instance, home loan rates have surged to anywhere between 7-7.8%, as banks passed on the increased cost of borrowing from RBI.
Additional rate hikes are expected to be announced in the coming days, reflecting today’s repo rate hike of 50 basis points to 4.9%.
SEE ALSO:
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India’s central bank confirms another rate hike is coming in June, but promises to soften the blow after the May shocker
Why a rate hike is not all bad news for you – and how you can take advantage of rising interest rates