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Rising Interest Rates Hit The Bottomlines Of India Inc: ASSOCHAM

The cost of borrowing for India Inc has risen sharply by as much as 60 per cent over the last twelve months across various sectors, an ASSOCHAM Eco Pulse study has revealed.

The interest rate regime, which started shooting up since March 2006 had its impact on the bottomline of companies across various sectors with the maximum brunt being borne by the firms in cement followed by machinery and automobiles.

The inflation has risen consistently from the month of March when it crossed the mark of 5 per cent. The inflation subsequently touched 5.7 per cent by May and RBI hiked the reverse repo and repo rates by 25 basis points each effective June 9, 2006 as a result banks revised upwards their Benchmark Prime Lending Rates by 25-50 basis points from 10.25-11.25 per cent to 10.75-11.25 per cent. Prime Lending Rate (PLR) was again increased by another 25 basis points in month of August whereas during the third quarter of the previous financial year PLR was in the range of 10.25 to 10.75 per cent.

To counter the inflationary pressures in the economy growing at the rate of 9.1 per cent, the Reserve Bank of India, announced its decision to hike the Cash Reserve Ratio in two stages to 5.25 per cent and 5.25 per cent from the previous level of 5 per cent effective from the fortnights beginning December 23, 2006 and January 6, 2007 respectively.

RBI has recently increased the fixed repo rate under the LAF by 25 basis points from 7.25 per cent to 7.50 per cent in its third quarter review of the Annual Statement on monetary Policy, which would further build pressure on the credit availability to the industry.

The interest rates as a per cent of net profit has gone up by a huge 298 per cent in the case of cement companies and 248 per cent for Machines, followed by automobiles at 118 per cent. Under the services, media, consultancy and transport companies faced the maximum brunt of the hardening interest rates as their ratio to net profit (total sales) has increased by 401(242) per cent, 78 (38) per cent and 72 (28) per cent.

The AEP study covered a sample of 160 companies across sectors including pharmaceuticals, cement, sugar, paper, breweries, metals, textiles, consultancy, IT, telecom, engineering etc.

The services sector has witnessed higher burden of interest cost during the period with the average rise of 71 per cent as compared to manufacturing at 60 per cent.

The sugar industry was most severely impacted by the hike in the prime lending rates of the banks as their interest cost shot up 5 times in the third quarter. Interest cost in textiles and auto industry increased by 208 and 115 per cent over the third quarter of last year. Pharma and consumer goods sector saw a 100 per cent each in their financing cost. On the other side, the sectors pertaining to steel, metals, machines, tiles and breweries, incurred lower interest cost as compared to last year. The companies with diversified interest also reduced their financing cost by 15 per cent.

Consultancies and media & entertainment sector were predominantly affected in the services sphere, as their cost of funds escalated by more than 300 per cent during the three months time. IT and infrastructure sector witnessed a moderate rise of 27 and 22 per cent each in their average interest rates cost, whereas telecom, hotels and engineering sectors witnessed a decline ranging between 2 to 44 per cent. The real estates companies also reduced their average interest cost by 53 per cent.

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