India Inc, while welcoming the Reserve Bank of India's move to cut the key interest rate, expressed doubts on lenders’ response to pass on the benefits to customers.
"We should see the effect of the rate cut by in the next one to two months depending on the steps taken by banks and financial institution," said Ravi Sud, CFO, Hero Honda Motors. "We do not see any immediate impact of the cut so far as the two wheeler industry in concerned."
The RBI cut its repurchase rate, or the rate at which it lends to the banks, by 100 basis points to 8 per cent in a bid to boost sentiment and soften interest rates.
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"The repo rate cut clearly signals that the banks should lend more. We have to wait and watch to see what steps will banks take," said Sanjiv Bajaj, ED, Bajaj Auto. "We are hoping that our consumer finance business should do better business."
Industry executives expressed skepticism on immediate relief because the banking system was facing liquidity crunch forcing lenders to push rates higher. To worsen the situation, an anticipated downturn in economic growth exacerbated the cautiousness.
"The problem is that liquidity is not being sustained in the market. The RBI is infusing liquidity by sucking out rupees. Given the parody, it's not clear if this would improve liquidity," said George Issac, CFO, GVK Group.
In normal circumstances the central bank measures, including a cut in the cash reserve ratio and followed by a repo rate cut, would have boosted liquidity and reduced interest rates immediately, but RBI is tackling several variables including controlling inflation, infusing liquidity and ensuring the rupee doesn’t depreciate further, which works at cross-purposes. Some banks, taking advantage of the tight liquidity, were lending money at 15-18 per cent, Issac said.
Owing to the liquidity crunch and a global slowdown, several companies had cut down expansion plans.
"We have reduced our investment plans by 20 per cent for the financial year. We have seen a decline in export due a drop in demand from overseas market. In addition the domestic volumes are also due to come down due to sluggish demand,’’ said Venu Srinivasan, CMD, TVS Motors.
Company CFOs shrugged off the measures announced by the central bank saying the central bank’s response was a bit delayed and may not have an impact on their future plans.
"We need to see how fast interest rates come down. These measures have come a little late, they should have been done, as of yesterday,’’ said Arvind Parakh, director for strategy and business development, Jindal Stainless. "Our plans will stay as it is. Wherever we have achieved financial closure, will go ahead with projects and where we had initiated discussions, will put on hold."
Instead of taking a step-by-step approach in this matter, there’s a need for a big bang approach with deeper cuts at one stroke in repo as well as bank rate”, stated Amit Mitra, secretary general Federation of Indian Chambers of Commerce and Industry.
The industry now wants the government to take more steps to address the present financial turmoil, for instance FICCI wants lowering of SLR rates and utilisation of a small portion of forex reserves for lending through banks to companies for meeting their credit requirement and overcome the current liquidity crunch.
CII also recommends the government to bring down the CRR rate to 5 per cent from existing 6.5 per cent and creation of dollar fund out of India's forex reserves, which could be worth about $7 – 8 billion. This fund would be useful in buying Indian assets and thereby creating stability and liquidity in the markets, CII further recommends.
Still, officials at infrastructure and power companies felt a marginal reduction in interest rates could reverse sentiments and ease the burden of higher costs.
"We have many such projects in the pipeline and the reduction in the interest will help us in going for additional borrowing," said L Madhusudhan Rao, Chairman, Lanco Infratech.
Expecting interest rates to come down to a level of 10 per cent, he said that even a one per cent reduction in the interest rate was good in the current situation of global financial crisis.