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The RBI move to mark up the key banking rates for the 13{+t}{+h} time since March 2010 has pushed India Inc to press the pause button on their expansion plans.
“We have slowed down our brownfield expansion as the cost of borrowing has increased substantially ever since we first conceptualised our plans. Now, with the recent rate hike we will put the expansion on backburner till the rates come down which we do not expect to happen any time sooner,” said CEO of a secondary steel manufacturer.
Though banks have not passed on the rate hike of 25 basis point implemented by the RBI in September, they will do a rethink this time around. “Most of the banks are flush with funds as the credit offtake has tapered off. With margins in the banking sector getting squeezed, some of the banks may increase rates,” said an analyst.
The central bank had increased repo rate (at which banks borrow from RBI) by 525 basis point in the last 18 months to contain the raging inflation. Though the RBI had signalled a pause on future rate hike, it has left options open.
“...notwithstanding current rates of inflation persisting till November, the likelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted. However, as always, actions will depend on evolving macroeconomic conditions,” said the RBI.
Mr Mudit Jain, President, DCW Ltd, said that besides rising borrowing cost, many companies are rethinking on their expansion due to slowdown in demand and mounting production cost.
“In fact, I suggest, the RBI should have reduced the rates to enhance supply of commodities which will automatically reduce the inflation. Given the fact that inflation is still above the RBI's comfort level even after increasing rates as many times, it is worth attempting unconventional measures,” he said.
There is still an element of suppressed inflation as domestic fuel prices of administered petroleum products do not reflect the full pass-through of global commodity prices.
The benefits of decline in global crude oil prices were more than offset by the depreciation in value of rupee against dollar.
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