 "Rate hike means cos have to go overseas to raise money")
Overseas borrowing of companies is expected to go up as Reserve Bank of India (RBI) looks to raise interest rates for the ninth time in a row.
According to RBI’s macro-economic and monetary developments paper, the borrowing in 2010-11 from external commercial borrowings and foreign currency convertible bonds was Rs 59,645 crore, the highest in three years. The short-term overseas credit is at Rs 38,854 crore, yet another high for 3 years (and this is only for 9 months to December 2010).
[caption id=“attachment_3674” align=“alignleft” width=“380” caption=“Loans to get more expensive as RBI is set to increase interest rates. Reuters. “]  [/caption]
Bharti Airtel has already said that it is looking to raise $1 billion through an overseas bonds issue. Jindal Energy, which is setting up mega power projects, is also looking to refinance debt worth Rs 7,000 crore. Companies will look to bring down their average cost of borrowing. This is because it hurts their profitability.
According to RBI, for the quarter ended December 2010, for 2,600 companies, the interest cost as a component of gross profit was 21.1%. This is against the average 18% in the previous fiscal. Over the past one year, companies have witnessed a surge in input costs. Companies are dealing with wage inflation and raw material price rise.
Needless to say, companies would be under pressure to cut costs. The central bank needs to allow infrastructure projects to be funded so that the momentum in this most critical area is not disrupted. The RBI paper says that out of the total costs of projects sanctioned in financial year 2010-11 (April- December), the largest share is envisaged to be invested in the power sector followed by the telecommunication and metal and metal products.
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