While reiterating that the fundamentals of the Indian economy are sound, Reserve Bank of India Deputy Governor Rakesh Mohan today said domestic interest rates may harden due to the increased demand from Indian companies which are finding it tough to get money from global markets.
While domestic investment is largely financed through domestic savings, Indian companies have raised significant amounts from international markets. The current risk aversion in the international financial markets could have some impact on the Indian corporate sector’s ability to raise funds from international sources and thereby impede some investment growth, he said at the meeting of International Monetary Fund’s Financial Stability Forum in Washington DC.
“Such corporates would, therefore, have to rely relatively more on domestic sources of financing, including bank credit. This could, in turn, put some upward pressure on domestic interest rates,” the deputy governor said.
Moreover, he pointed out, domestic primary capital market issuances have suffered in the current financial year in view of the sluggish stock market conditions. So, one can expect more demand for bank credit and non-food credit growth has accelerated in the current year. Credit growth was estimated at 24.8 per cent till the end of September 2008, compared to around 22.6 per cent in the corresponding period last year. Despite several round of rate hikes, the growth has been over the RBI’s projection of 20 per cent in 2008-09.
Mohan said that the Indian corporate sector will see some impact of the global financial turmoil. One, there is reduced availability of international capital — both debt and equity. Two, there is a perceived increase in the price of equity with lower equity valuations, and pressure on the exchange rate.
On the other hand, on a macro basis, external savings utilisation have been traditionally low (between one to two percent of the gross domestic product) and with a high domestic savings rate, the impact can be expected to be at the margin, Mohan said.
Moreover, the continued buoyancy of foreign direct investment suggests that confidence in Indian growth prospects remains healthy.