Imminent rate hike not big concern for India Inc CFOs, CFO News, ETCFO
Last week, the US Fed raised interest rates for the first time in more than three years, approving a 0.25 percentage point hike to rein in unprecedented inflation. The U.S. Reserve Bank signaled further rate hikes in 2022, and its median projection for the benchmark rate at year-end was 1.9%.
While this could be a global signal for India’s central bank to follow a similar course to tackle record inflation at home, an impending rate hike is not seen as a major concern for India Inc’s CFOs. Finance officials expect the RBI to continue to support growth while controlling inflation and expect no more than 25 basis points of interest rate hikes by September. They do not expect the RBI to be very aggressive in raising rates over the full year and said its likely ‘gradual approach’ would give CFOs ample time to prepare for such a action.
They also said a 25 basis point hike had already been priced in by CFOs over the next six months and that demand and supply seemed to them to be bigger issues than a possible “small increase”. interest rates, which they say finance people are better equipped to handle.
Not a major concern
Inflation eats away at CFOs’ balance sheets; retail price inflation remains high at around 6%. High oil prices are not very favorable either. Inflation must therefore be moderate and the imminent rise in rates will occur here. But, in my view, rising rates as they happen shouldn’t be a major concern for CFOs unless and until there’s a demand and demand issue. supply in the markets… CFOs have cut debt during the pandemic, which should help them weather the impending rate hike.Sameer Agarwal, Group Finance Director, Manipal Hospitals, told ETCFO
Agarwal expects an increase of 25 basis points in short-term interest rates and 40 basis points for the whole of 2022-23. He sees no major challenges in funding future acquisitions with respect to his own Manipal Hospitals business, as he said the economics of the deal or deals should outweigh any marginal increase in financial costs, as well than on the higher revaluation. lately supports the company’s funding profile. But he warned that if the rise in rates becomes very dramatic, say above 100 basis points over the next 12 to 18 months, it could impact the credit drawdown for CFOs.
RBI should support growth
Jayesh Jain, chief financial officer of non-bank lender Hero FinCorp, echoed a similar perspective. From an NBFC’s perspective, he said CFOs will generally be concerned if their ability to borrow or pass on costs is affected; and he sees neither of that happening.
The ability to borrow should not be a problem since there would be enough liquidity even if it cost 25 or 50 basis points. As for the ability to pass on the increase, that may be affected in the short term, but ultimately I don’t think that will be a major concern either. If rates rise, there could be pressure on spreads for a quarter or two, but after that banks and NBFCs should be at par in terms of lending rates.Jayesh Jain, Chief Financial Officer, Hero FinCorp
Hero FinCorp’s CFO also said that India is placed slightly differently to the United States and therefore does not expect the same quantum or pace of increase as can be see in the United States. “Maybe a 50-75 basis point hike is possible over the next 12-18 months with us, but it looks to me like we’re still a quarter away from the first rate hike. of the RBI’s Monetary Policy Committee (MPC) meeting indicate that policymakers may not react immediately to geopolitical tensions and will continue to support growth,” Jain said.
At its last monetary policy meeting in February, the central bank remained “accommodative” and kept interest rates at a record low of 4%. Governor Shaktikanta Das has repeatedly indicated that the RBI will not raise rates hastily or precede policy normalization. Minutes of the February Monetary Policy Committee meeting indicate a continuation of the RBI’s dovish stance. “The MPC notes that inflation is expected to moderate in the first half of 2022-23 and move closer to the target rate thereafter, leaving room to remain accommodative,” the February MPC meeting minutes read. of the RBI. An accommodating position implies that a rate cut is not excluded.
Demand fundamentals would help
Nutan Gaba, chief financial officer of housing financier Home First Finance, said demand fundamentals for his sector remain strong and that should help finance managers better weather the impending rate hike. In addition, a “calibrated increase in interest rates” will control inflation and allow businesses to focus on smart investments, she said.
Interest rates will rise – it’s real… The good news is that underlying growth and potential is more robust than ever. Consumers’ aspiration and propensity to spend are high relative to history. A calibrated increase in interest rates will control inflation and allow companies to focus on making wise investments in the business and boosting productivity for better returns on those investments.Home First Finance Chief Financial Officer Nutan Gaba
Impact on investment plans
CA Hemant Kumar Ruia, chief financial officer of a major infrastructure company, said the concern of finance officials would depend on what scenario they end up in. He sees three scenarios playing out.
Companies with low margins may be forced to rethink their investment plans, those with medium margins will have less reserve up their sleeve but may eventually move forward with investment plans, and those with high margins will have little affected by investments.Hemant Kumar Ruia, CFO, in a large infrastructure company
In addition, companies where the demand environment is good or where there is a capacity constraint may find it relatively easy to meet the possible increase in financial costs, as they can pass on the same through higher prices. high, he said.
Ruia expects interest rates to rise by 1.5 to 2 percentage points over the next two years. Oil is likely to be an important factor for the central bank to decide the quantum, he pointed out. “Looking at the way oil prices are moving right now, it’s really not clear which way this inflation elephant is sitting,” he signed.
The path of interest rates will likely be determined by the evolution of retail price inflation. The RBI had pegged inflation at 4.5% in FY23, down from 5.3% in FY22, but this projection was made before the Ukraine-Russia war does not burst. The war sent world crude prices above $130 a barrel. While global prices have moderated somewhat now, they continue to remain above the $100/barrel mark.
“Crude oil prices touched $130 and then went down to $99 and today they’re at $112. So we really don’t know how that’s going to play out,” Governor Das said at the meeting. of the National Council of the Confederation of Indian Industry held in March. 21.
CFOs are expected to watch for further clues at the RBI’s next monetary policy meeting in April.