Will the RBI rate cut make India Inc restart its investment engine? That’s the key question from the rate cuts made by the Reserve Bank of India on Tuesday.
Interest costs of over 2,000 top Indian companies have begun to ease off. For the second quarter of 2012-13 interest cost has grown by only 11.4 per cent against the steep 58.5 per cent in the same period a year ago. Their interest burden too has come down to 27.2 per cent of revenue compared to 29.1 per cent a year ago. The companies are obviously getting more breathing room in their operations (RBI Macroeconomic Survey).
So while corporate investments are down to about 5.5 to 6 per cent of the GDP — the same level as in the aftermath of the global financial crisis in 2009-10 — Tuesday’s rate cut actually goes further than what the initial reactions would suggest. Finance minister P Chidambaram has stressed on the need to improve investments and RBI governor D Subbarao too acknowledged it as the missing driver that has guided his decision to cut rates.
Interest rates and the consequent servicing costs had dimmed the appetite for loans by corporate India in 2011-12 and even made the first few months appear bleak in 2012-13. The central bank in its second quarter monetary policy review was forced to cut credit growth projection for 2012-13 by one percentage point to 16 per cent and overall bank credit as well as non-food credit have remained within the range. For the fortnight ending January 11, 2013, non-food credit or the money lent by banks to individuals and institutions, rose by 16.2 per cent year on year. That picture is obviously changing.
The next centre of action has to be at the Cabinet Committee on Investments. The CCI is expected to clear a long backlog of projects stalled by internecine fights among ministries in oil, coal and also power in its meetings beginning next week. This is what the RBI too has listed as key factors that have a part to play in reviving investor sentiments.
Surabhi is a Special Correspondent based in New Delhi