India Inc's capex costs to shoot up as RBI hikes repo rate by 50 bps

Indian companies that are planning to invest thousands of crores of rupees in ramping up their capacities are staring at the prospect of higher costs of funds with the Reserve Bank of India (RBI) hiking the repo rate by 50 basis points on Friday.

After a two-year lull due to the Covid-19 pandemic, many firms have accelerated their capital expenditure plans. Conglomerates like Reliance Industries (RIL), the Tata group, Birlas, Adanis, and Jindals are investing heavily in sectors such as renewable energy, cement, and paints. Reliance and Bharti Airtel, the biggest players in telecommunications, are planning the roll-out of 5G services in the coming months after winning spectrum in the just-concluded auction.

Corporate leaders said their cost of funds would go up substantially after the latest rate hike. “The rate hike was on expected lines and inevitable due to geopolitical reasons. There is no respite as overseas rates have also gone up substantially,” said Prabal Banerjee, former head of finance at Bajaj Group. 

The biggest losers would be the rate-sensitive real estate and two-wheeler sectors, which may see demand coming down as home and auto loan rates shoot up. “For the real estate sector, the third consecutive rate rise will mean a deterioration in affordability and may impact the sentiments of homebuyers. With the cumulative rate hike until today, assuming complete transmission, prospective homebuyers’ affordability shrinks by around 11 per cent, i.e. from the ability of purchasing a house of Rs 1 crore, the value has shrunk to Rs  89 lakh now,” said Shishir Baijal, chairman and managing director of Knight Frank India.

“Developers are expected to undertake mitigating measures to soften the blow on homebuyer affordability. The increase of interest rates and the subsequent transmission of these into the home loan rates has the capability of impacting demand, and we hope that the latent demand for housing will soften the impact of the latest change in the repo rates,” Baijal added.

Sriram Mahadevan, managing director, Joyville Shapoorji Housing, said real estate has long been the preferred asset in India, and since the pandemic, home ownership was driving demand. “Until now, commercial banks have transmitted the policy rate hike to the borrowers, resulting in a rise in lending rates across all sectors,” he said.

Mahindra & Mahindra, however, said rising interest rates would not hurt its sales. “Despite the interest rate hike, we got 100,000 bookings for the Scorpio-N, and (have been) getting 10,000 bookings for the XUV700 every month. This is on the strength of the products we have,” said Anish Shah, group managing director and CEO, M&M. “This is the best time for the company,” he added, alluding to the strong demand being witnessed by the tractor and SUV major.

The RBI indicated on Friday that investment activity was picking up. Production of capital goods recorded double-digit growth for the second straight month in May and capital goods imports witnessed robust growth in June, it said.  

The manufacturing PMI (purchasing managers index) rose to an 8-month high in July, and the services PMI indicated continued expansion in the month, although it fell from an over 11-year high of June. The RBI also said the capacity utilisation in the manufacturing sector was above its long-run average, signalling the need for fresh investment activity in additional capacity creation.

Chief executives in the infrastructure sector have pointed out slowdown concerns hitting investment and demand. A tightening monetary policy stance hardly bodes well for companies, as interest costs will rise. 

“The overall interest rate cycle has only been picking up as the RBI looks to tackle inflation,” said MS Unnikrishnan, capital goods veteran and former MD of Thermax. “This is a near-term concern,” he added.

Sunil Mathur, managing director and chief executive officer, Siemens, said, “While we are currently not experiencing a slowdown in public and private capex spending, we are concerned about global headwinds impacting demand, which could result in a slowdown in capex spending.”

At Larsen & Toubro’s annual general meeting held on Thursday, Chairman AM Naik pointed to the macroeconomic and geopolitical challenges facing businesses in India, even as the country was expected to post “top quartile growth” among emerging markets in the medium term. 

Rajiv Agarwal, managing director, Essar Ports, said the RBI’s decision to raise the repo rate clearly signalled the intent to keep the country within the targeted inflation rate.