Reality, auto industry not happy 1,2,3,4|News

Reality, auto industry not happy 1,2,3,4|News

Mumbai: Industry heads across sectors, especially those in realty, automobiles and infrastructure, decried on Tuesday's “unexpected” 50-basis point rise in repo rates by the Reserve Bank of India (RBI).

 

While real estate companies complained the rise in the cost of funds would affect their projects, auto manufacturers rued that light commercial vehicle sales would flatten and heavy commercial vehicle sales even fall. Infrastructure companies say if they fall short of funds, there would be a dearth of new projects.

Chambers of commerce say it's clear RBI had decided to sacrifice growth to tame inflation, with 11 consecutive interest rate increases in the past 15 months.

"I personally expected that this time RBI would not increase interest rates," said Seshagiri Rao, joint managing director and group chief financial officer (CFO) of JSW, adding: "Interest rates are already in the range of 11.5-12 per cent for long-term financing."

V Ashok, CFO of the Essar Group, also expressed "surprise" at RBI's decision. "RBI has laid down its priorities, on controlling inflation in the short/medium term, rather than (promoting) growth. Increase in interest rates over the last one year has not curtailed demand and inflation remains a concern. In an era of volatile commodity prices and shorter business cycles, continuous hikes in costs of borrowing will hit the bottomlines of corporates. There, clearly, are gloomy days ahead for corporates in the short/medium term." Gautam Thapar of the Avantha Group said, "RBI has seen something that the industry has not", adding that business sentiment would be affected.

Infrastructure companies were concerned, too. IVRCL has around Rs 2,000 crore debt in the parent company. "This hike in interest rates will definitely have an adverse affect. In the next few months, if they increase the rates again at this level, our interest burden will go up. The number of new projects which come out will go down and will not be as aggressive if liquidity is tightened."

However, Y M Deosthalee, CFO of L&T, does not believe that "overall investments will slow down after on Tuesday, as all decisions are not linked to rates", adding: "Investments will continue. Certain rate-sensitive areas will see a slowdown but that is what RBI wants. Its data show that growth is not slowing down but inflation is a genuine problem. RBI on Tuesday has very little choice, as inflation management has no easy solutions. We have to live with these cycles. I am sure, once the cool-off begins, then RBI will pause."

REAL ESTATE

The real estate sector may see a fall in property prices in the near term. Gagan Banga, CEO, Indiabulls Financial Services, opined, "Home loan rates are bound to go up; they are already at almost 11 per cent. While home loan rates tend to even out over a period of time, high rates at the start of the transaction tend to result in postponement of home purchase deals, thus forcing developers to reduce rates or face a complete freeze."

Pranay Vakil, chairman of Knight Frank, said increasing the repo rate would lead to a further slowdown in real estate. "It will become more expensive for developers to borrow money. They're already in a squeeze. It will slow down constructions. Developers will have to reduce prices to keep the volumes going. Property prices will reduce by 15-20 per cent," he added.

Anuj Puri, chairman of Jones Lang LaSalle, concurred that RBI's rate rise was bad news for property buyers but expects property prices to fall 10 per cent in metros. "After Diwali, as the demand picks up, rates will stablise. There will be no impact on pricing of commercial properties, as its demand is higher than supply," he added.

SLOWDOWN FEAR
Even the consumer durables sector is worried. Vipul Mathur, vice president, marketing, MIRC Electronics, said the rise may impact consumer buying power in the medium term. "With EMI pressure mounting and inflation increasing the food bill of the household, middle-class households may either postpone or shift the preference to the economy range for consumer durables...Super-premium products may still not see a drop, as the elite are not impacted by this."

Industry bodies caution that RBI's move could backfire, with growth slowing considerably. Chandrajit Banerjee, director-general of the Confederation of Indian Industry (CII), asserted that "RBI has emerged as the most aggressive central bank tasked with containing inflation...this is a matter of great concern, since there could be a tipping point beyond which salvaging a downward spiral of growth could be an arduous task."

He said it's "imperative now that non-monetary measures are rapidly deployed to deal with supply-side issues, which continue to contribute to inflationary pressures". He pointed out that high domestic interest rates are driving industry to borrow in foreign currency, potentially risky in the event of exchange rate fluctuations.

CII is also apprehensive that banks would be constrained to pass on the increase in repo and reverse repo rates to customers and this would have a fairly detrimental impact on the economy as a whole. Particularly on sectors where consumer financing plays an important part in demand. "CII would urge RBI to pause and indicate when this tight monetary stance would be eased," said Banerjee.

The Federation of Indian Chambers of Commerce and Industry said the rise was "a major disappointment to the industry".

"With the growth momentum already under pressure, this move will further hurt prospects. Even the projected growth rate of eight per cent for 2011-12 now looks difficult to achieve," said Rajiv Kumar, secretary general.

"The single-minded focus of RBI in tackling stubborn inflation has continued, with tight monetary management. This will adversely impact the already falling growth momentum in interest-sensitive sectors, especially small and mid-sized companies," said Dilip Modi, President of the other industry body, Assocham. It feels the "hike may not deliver the results as anticipated, as growth will be hit significantly due to the high-interest regime".