Rising interest rates adding to challenges for corporates
Comapnies with weak balance sheets are likely to redraw spending plans
NEW DELHI/MUMBAI: The expectation that the Reserve Bank of India (RBI) may start hiking rates in June is adding to the challenges faced by corporate India, especially at a time earnings are under pressure because of rising commodity prices.
Companies, especially those with weak balance sheets are likely to redraw spending plans amid expectations of a hike in interest rates in the near future. An impending rate hike combined with sharper input costs is expected to make many corporates go slow in expansion to conserve bottom lines and interest serviceability, according to industry observers.
“Higher Interest rates always negatively impact the overall economy as it impacts capex plans and investments of the corporates,” said Mitul Shah, head of research, Reliance Secu rities. There would be a direct impact on the earnings of corporates with a higher interest burden in coming quarters, Shah said.
The market awaits RBI’s first hike, but many mid-cap companies had already started showing early signs of weakness in their ability to service debt in the December quarter because of rising raw material costs and covid-related disruptions.
An analysis of 77 companies in the BSE Midcap index showed that the interest coverage ratio (ICR), a measure of how easily a company can pay interest on its debt from earnings, declined sharply to 4.5 times at the end of the December quarter from 6.1 times at the end of the preceding quarter. It was also slightly lower than the 4.7 times at the end of December 2020.
Borrowers will also have to brace themselves for a faster hike in lending rates under the new external benchmark linked lending rate (EBLR) regime as RBI starts hiking policy rates. Under the external benchmark based pricing of loans, any change in the policy rate is passed on to lending rates for new and existing borrowers immediately and banks are not allowed to adjust their spreads for existing borrowers for a period of three years in the absence of any significant credit event.
Borrowers have enjoyed the benefits of this loan pricing so far under a falling interest rate scenario.
However, bankers warn that the hike in lending rates is going to be sharp. Many economists are pencilling in a policy rate hike of as much as 200 basis points this year, translating into an equivalent amount of lending rate hike, which economists believe will impact demand recovery.
“The issue is if the repo rate is raised by X basis points, the entire lending rate will go up by that amount, to the extent that other things remain the same. This will act as a disincentive for nascent demand recovery. In an increasing interest rate regime transmission is thus going to be difficult. Banks and RBI will find it difficult to tread this path,” according to Soumyakanti Ghosh, chief economist, State Bank of India.
Contributions by Shayan Ghosh, Gulveen Aulakh, Alisha Sachdev