The Hindu Business Line : Market View

The surge in international acquisitions by Indian companies, and what is now recognised as a definitive expansion in capital investments, is clearly the much-awaited next phase in the growth phase of the economy. A healthy growth in revenue and profits requires investment in additional capacity to sustain it over the long run. There are however two macro aspects that will define the length and depth of this phase of capacity expansion.

The first is about enabling optimal choice of location for assets and the much-debated need for enabling infrastructure in India, so new capacities can be added back home. The growing number of Indian MNCs seeking out capacities abroad are but strategically locating elsewhere due to bottlenecks at home. The second is about enabling efficient funding of these investments.

Given the low debt equity ratios and the sustained growth in earnings, it would seem that companies would choose to borrow rather than deploy equity. But most investments are being funded almost completely by accruals. This perhaps has more to do with inefficiencies in borrowing capital locally, than about deliberate strategy to choose accruals over borrowings.

To expand assets without being able to borrow money to fund them, given the healthy balance sheets is likely to emerge as a constraint to the corporate sector as the investment cycle gathers pace.

OptiMix View and Outlook

By raising the Repo rate and leaving reverse repo rate unchanged, RBI has sent signals to commercial banks to apply prudent use of credit and maintain its quality. The widening of the corridor between the Repo and Reverse Repo rates is likely to exert a negative pressure on liquidity, which we believe would lead to a dearer borrowing rate in the near-term. The current margins in liquidity indicates that broad money supply growth of 19 per cent and credit off take in excess of 29 per cent seems still to be on a higher side. RBI expects monetary and credit growth aggregates to be still higher than earlier projections. RBI has tried to ensure that appropriate liquidity is maintained in the system consistent with the objective of price and financial stability.

Kotak Mutual

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