The recent spate of interest rate hikes is unlikely to leave any major hole on the balance sheets of India Inc, as the sensitivity of corporate earnings to interest rates has declined over the years, HDFC Bank has said.
The bank said in its fortnightly newsletter for its customers that the recent rate hike announced by Reserve Bank of India could set the tone for further increase in lending
rates of corporate borrowings, even as banks have already been pegging their prime lending rates higher over the past few months.
Any sharp jump in lending rates may increase the borrowing costs for the corporates, as companies are tapping on fresh debts to fund their capital expenditure plans.
However, the sensitivity of corporate earnings to interest rate increases has declined over the years, as the corporate balance sheets are underleveraged unlike in the past, HDFC Bank said.
Therefore, an uptrend in interest rates could have a relatively lower impact than a few years ago, it added.
The Reserve Bank of India raised the benchmark interest rates earlier this month on concerns of growing interest rates globally and growing inflationary pressure.
The RBI hiked the reverse repo rate by 25 bps to 5.75 per cent and repo rate to 6.75 per cent on June 8.
The rate hike followed the government's decision to raise petrol and diesel prices by Rs 4 and Rs 2 respectively, which would lead to rise in inflation rate by atleast 40 to 50 bps, HDFC Bank said.
Analysts believe that increase in lending rates from the current levels can result in a higher borrowing rate for corporate India, which would increase their liabilities and in turn add to their vulnerability.
The companies have also started opting for different fund raising avenues other than debt as well, thereby reducing their susceptibility to rate hikes, market analysts said.
A leading analyst cited the example of Infosys, which has zero debt ratios making the impact of interest rate hike marginal.
A recent study of Assocham showed that corporates from various sectors such as telecom, cement, steel, textiles and sugar managed to cut their interest costs in the March quarter despite the upward revision in the bank rates and are likely to maintain a healthy trend in the current quarter.
The cut in interest costs was contrary to the expectations that the corporates may have to bear a high burden on interest cost.
The corporates are likely to maintain their robust cash flows, net profits, demand and profit margins in the June 2006 quarter, which would enable them to successfully manage their debts and reduce their interest cost in this quarter.
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