'Surprise rate cut by RBI is just a start but we need more'

Indian businesses face lending rates that are well above those in developed nations and among the highest in emerging markets, on some estimates more than double those seen in China.

Businesses, saddled with crippling costs of capital, urged the Reserve Bank of India to move boldly after its rate cut on Thursday, with some demanding easing of a full percentage point in the next six months to fuel a recovery.

The Reserve Bank of India lowered interest rates by 25 basis points, in a surprise move weeks ahead of its own bi-monthly meeting and of the Narendra Modi government's maiden annual budget.

"A further reduction would have to be achieved to induce investments," said R Shankar Raman, Chief Financial Officer at Larsen & Toubro.

He said both the cost and the availability of capital remained a concern.

Struggling with an economy that has grown at less than 5 per cent over the past two financial years, Thursday's step would have to usher in a significant round of easing to make investments more profitable.

Indian businesses face lending rates that are well above those in developed nations and among the highest in emerging markets, on some estimates more than double those seen in China.

In a survey published by Ernst & Young last year, only 15 per cent of respondents said India's cost of capital had improved in the last three to four years.

VS Parthasarathy, chief financial officer at Mahindra & Mahindra, India's top utility vehicle maker, said he saw Thursday's cut as a signal.

"The real effect at 25 basis points is not going to be very much, however it is the start of a cycle," he said.

Finance Minister Arun Jaitley last month pointed to the high cost of capital for India's businesses as a key factor behind a manufacturing slowdown.

He said on Thursday the RBI's cut would help reboot the economy.

Businesses, however, were more cautious.

Even if banks pass on the 25 basis point drop and bring down lending rates, firms said they needed more to rethink major investment decisions, particularly long-term plans from infrastructure companies key to the government's recovery plan.

Isaac George, chief financial officer of GVK Power & Infrastructure, said his company was paying around 12.5 per cent on debt today -- but would need that to come down to 9 or 9.5 percent to make infrastructure projects viable.

"The price continues to be too high," he said.

Moreover, he said, the government would need to push through some of its more substantial reforms, including improvements to regulation, banking and moves to facilitate land acquisition.

"The rate cut is only one aspect of the things we are looking forward to," said George, whose company holds 240 billion Indian rupees ($3.9 billion) in debt.

(Additional reporting by Devidutta Tripathy and Aman Shah in Mumbai)