 "India Inc to press the capex pedal with Budget push")
The Indian corporate sector must get its act together to take advantage of the lower borrowing cost to make capital expenditure (capex) and relieve the government of heavy lifting, according to the Reserve Bank of India’s (RBI’s) state of the economy report released on Tuesday.
The report, authored by RBI staff, including Deputy Governor Michael Debabrata Patra, expects the current liquidity conditions to ease with government spending, and inflation expectations to edge down, while observing that unsecured loans continued to grow despite an increase in risk weighting.
“Overall, the corporate sector must take advantage of the space ceded in financial markets by a lower budgeted borrowing programme and the easing of borrowing costs that has already begun in response to the Interim Budget for 2024-25, driven as it is by capex and consolidation,” said the report. It clarified that views expressed in this article were those of the authors and did not represent the views of the RBI.
It noted India Inc’s balance sheets were healthy on the back of high profits, with leverage remaining constant or improving and the return ratio at a multi-year high. The report pointed out fixed asset growth was evident in the oil and gas sector and in chemicals. In sectors such as steel and automobiles, for which stock returns have exceeded index returns, fixed asset additions have, however, been underwhelming.
“Expectations for a fresh round of capex by the corporate sector to take the baton from the government and fuel the next leg of growth are mounting,” the report said.
According to the report, the power sector’s capex plans are the most ambitious, but leverage is high among distribution companies.
“Even so, India has made big strides in the green energy sector over the past decade, with renewable power constituting 43 per cent of the total installed power capacity. The corporate must seize this to expand capex, especially with the target of tripling renewable energy capacity to 500 gigawatts by 2030,” it said.
The report highlighted the banking and financial sector maintained strong growth in profitability on the back of the still burgeoning credit demand in the economy and lower provisioning costs.
In this context, the report said banks’ unsecured loans grew in spite of the hit on capital due to increase in risk weightings.
In November, the RBI increased risk weightings for unsecured loans like personal loans and consumer durables from 100 per cent to 125 per cent. While risk weighting for credit cards of banks was increased from 125 per cent to 150 per cent, it was raised to 125 per cent for non-banking financial companies (NBFCs). The regulator has also increased risk weightings on bank loans to higher rated (A and above) NBFCs by 25 percentage points.
According to the latest RBI data, banks have extended loans worth Rs 59,040 crore to NBFCs and Rs 37,222 crore under the “other personal loan” category between November 17 and December 29.
The report also highlighted pressure on net interest margins of banks in the coming days. “The lagged effect of pass-through of policy rate increases into deposit and certificates of deposit rates exerted pressure on net interest margins.”
The report sounded optimistic on the inflation front as it sees inflation expectations to edge down while cautioning against renewed pressure from cereals and proteins.
“Overall inflation developments are also turning favourable, providing a stable environment for corporates to plan expansion strategies in anticipation of a pick-up in demand,” the report said.
“With consumer price inflation coming off its November-December spikes in its January 2024 reading, inflation expectations may stabilise and edge down, although renewed pressures from cereals and proteins cannot be ruled out,” the report said, adding that core inflation was at its lowest since October 2019 and non-food wholesale price inflation remained in deflation.
“This should augur well for the input cost outlook and selling prices of manufacturing firms,” the report said.
Commenting on the liquidity conditions, which tightened again in line with the buildup in the government cash balance in the second week of February, the report said liquidity conditions would ease on the back of government spending. “Going ahead, rising government expenditure is expected to ease liquidity conditions,” it said.
Salient Observations
India Inc’s balance sheets healthy on the back of high profits
Pressure on net interest margins of banks in the coming days
Current liquidity conditions to ease with govt spending
Core inflation is at its lowest since October 2019
Non-food wholesale inflation remained in the negative
