High interest rates have started adding to the headline inflation defeating the purpose for which the Reserve Bank of India has been following a tight monetary policy, an ASSOCHAM study has revealed.
The study found that while the core inflation has remained well below the overall inflation, the capacity of the manufacturers to absorb the rising interest costs is fast reaching the breaching point.
The study based on the balance-sheet analysis of the companies which have so far declared their results, found that the interest costs have begun to bite not only the net profits but also the ability of the producers to absorb the cost push.
“From now on, the interest costs will result in additional expenses , under the overall ‘expenditure head’ to the extent of 10 per cent …It is no surprise that more and more firms are queuing up for debt restructuring before the RBI and the commercial banks,” the study ‘ Interest costs and the bottomline’ pointed out.
The study based on the balance-sheets of 158 companies found that the companies have so far managed to absorb the interest costs along with other rising prices of raw material to save their top line revenue from the demand slowdown.
“However, we find there is limited scope for such a re-adjustment now,” said ASSOCHAM President Rajkumar N Dhoot.
Besides, the ASSOCHAM study, conducted in the last two weeks, found that the high interest rates regime is adding to the woes of the banking sector. If the situation persists the way it is, the non-performing assets (NPAs) of the banking sector would come under further pressure, it said.
The problems of the NPAs would be more severe among the public sector banks, while the private sector banks too would face tough times going forward. This is because the increasing number of borrowers are finding it difficult to service the high cost debts. Moreover, given the global uncertainties and a sharp depreciation , currency risks surrounding the foreign currency loans have increased many times over. In the process, the hedging instruments have also become expensive.
“It is under these circumstances that the ASSOCHAM is urging the RBI, as it gives finishing touches to its credit policy review, to reverse aggressively the direction of the policy stance and help industrial growth. If such a course is not followed, the consequences for the industrial growth and its overall impact on the GDP would be quite adverse,” said Mr Dhoot.
In any case, the industry is grappling with worsening global economy and risk aversion in the financial markets. These factors have limited the ability of the corporates to raise equity from the market. “Efforts to deleverage the balance-sheets are coming a cropper, as is seen from the recent trend of the companies withdrawing their local and global follow-on and initial public offerings (IPOs), the study found.
Meanwhile the pressure on food inflation because of shortfalls in rains should not be confused with the core inflation. Such inflation cannot be tackled by the interest rates.
“It would be a mistake to let the food and vegetable inflation influence the price rise,” Mr Dhoot said.