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The Reserve Bank of India's move to increase repo rate by 25 basis points is aimed at controlling inflation rather than aiming for growth, say corporate CEOs.
Indian companies were not expecting the RBI to slash rates but were expecting the RBI to maintain the rates at the same level.
But a hike, finance heads, say will increase finance costs to about an average of 12% for large corporates.
"I think the RBI is on the right track to control inflation. The 0.25% repo rate hike will not make much difference to Indian corporates unless they are highly leveraged," says Prabal Banerjee, president - international finance of Essar group.
CFOs say very few companies are investing in new capacities till elections are over and are not contemplating investing in new projects.
Corporate investment to GDP has slumped from post 2007 crisis levels of 17.3% to 10.6%. Furthermore, the slowing has been concentrated in machinery and equipment — within which technological change is typically embedded vis-à-vis structures. It is no wonder then that apart from the direct impact of corporate investment on capital stock, the nature of the investment slowdown has meant that productivity growth has also slowed, constituting a double whammy on growth, say analysts.
Most of the big corporates like Reliance and Essar group are raising low cost funds from abroad to fuel growth.
"The idea is to take advantage of lower rates abroad and insulate the companies from volatility in the interest rates in India," says a CFO of a construction major asking not to be quoted.
