Rate hike won't ruin party: CEOs

Corporate heads bullish on prospects for FY08, according to a poll of 38 CEOs.

Brushing aside the recent hikes in the cost of capital, corporate chieftains are bullish on business prospects for the current financial year, though they expect interest rates to rise further in the coming months, according to a poll of 38 chief executives carried out by Business Standard.

Thirty-four of the CEOs polled, or 89.5 per cent, said they would not scale down business projections for 2007-08, though 28 of them, or 73.7 per cent, expect money to become costlier.

And 73.7 per cent of the CEOs also feel that the rising interest rates threaten to slow down demand, especially in sectors like housing and automobiles where consumer finance plays a large role.

"The Budget as well as the current regime of high interest rates will have an adverse impact on our industry. However, we are not scaling down our projections yet," said the CEO of a large cement company. "It is natural for rising interest rates to stifle demand," added Glenmark Managing Director & CEO Glenn Saldanha. 

GUNG-HO ABOUT '08 PROSPECTS
	Yes	No	No views
Do you expect interest rates to rise further this financial year?	28	10
Do you expect rising interest rates to stifle demand?	28	7	3
Will markets turn weak on fears of a slowdown?	15	13	10
Will you scale down business projections for the year?	4	34
Do you see more production capacities coming up?	22	8	8
Will the slowdown in the US impact you?	7	26	5

The Reserve Bank of India raised key rates steadily in 2006-07 to control inflation "� while it raised the cash reserve ratio that banks need to maintain with it by 150 basis points in three steps, it raised the rate at which banks access overnight liquidity from the central bank five times, resulting in an increase of 125 basis points.

As a result, the prime lending rates of banks have gone up by up to 300 basis points and consumer finance has become more expensive by up to 400 basis points in the last six months.

The liquidity mop-up had led to widespread fears of a fall in corporate earnings, as the current economic buoyancy in the country is fuelled by buoyant demand, unlike other Asian economies where exports are driving growth.

However, the CEOs polled, who represent important sectors like steel, cement, retail, automobiles, information technology, pharmaceuticals, consumer electronics, textiles and financial services, felt that inflation would continue to stay above the 5-5.5 per cent band targeted by the government as well as the RBI, which could lead to a further tightening of the monetary policy in the near future. Some of them expect interest rates to rise by another 100 basis points.

With money becoming dearer, some CEOs said the investments planned for the current financial year will be impacted, though projects that have attained financial closure will be executed.

Twenty-two of the 38 CEOs (57.9 per cent) said they expect more production capacities to come up during the year. The other 16 of them, or 42.1 per cent, either expected a slowdown or did not have a view on the subject.

"India will stop growing if interest rates continue to rise," said Eveready Industries Executive Vice-Chairman and Managing Director Deepak Khaitan.

As higher interest rates are likely to impact corporate earnings in the coming quarters, 15 CEOs (39.5 per cent) expected the stock markets to turn weaker in the days to come. A large number of Indian companies have planned to tap the markets to fund their ambitious expansion plans. With the markets taking a turn for the worse, a large number of CEOs felt these plans could be impacted.

However, the much talked about slowdown in the US does not seem to worry India Inc. A majority of the CEOs, 26 of 38 (68.42 per cent), said the impending recession would have no impact whatsoever, given India's small share in world trade (less than 1 per cent) and the reduced dependence on the US for exports. If at all, the information technology enabled services sector would get more orders from the US as companies there tightened their belts.