High cost of money starts hitting India Inc, says ASSOCHAM

The cost of money which started shooting up since the last twelve months following RBI consciously tightening liquidity has begun hitting India Inc which has seen a huge rise in its interest burden to the extent of 116 per cent in the last quarter of fiscal 2007, according to ASSOCHAM Eco Pulse Study on `Interest Cost Analysis of 150 Companies during Fourth Quarter of 2006-2007’

The worst hit companies out of a sample of 150 companies of ASSOCHAM Eco Pulse Study (AEP) were from real estates, engineering, IT and financial services, which have witnessed more than double increase in their interest rates.

The Reserve Bank, in its pursuit to combat inflationary pressures in the economy and control the growing strains on domestic capacity utilization, has hiked the cash reserve ratio and repo rate by 100 basis points and 125 basis points in stages during the year 2006-07. Consequently, the benchmark Prime Lending Rate of public sector banks and private sector banks has also increased by 1.5 per cent and 2.5 per cent within the same period.

One year weighted discount rate on short-term debt instruments like commercial paper and certificate of deposits has also shot up by 2.73 per cent and 8.18 per cent, the AEP study said.

Hardening of interest rates has started hitting the bottom lines of the industry. The corporates are still not sure whether the interest rates have peaked or there is still scope of further liquidity squeeze by the RBI. "The corporate results are an indicate towards the demand being impacted in the coming quarter and investment plans being hit leading to capacity constraints if the cost of money keeps its upward trend ", ASSOCHAM has said.

The real estates companies have suffered the major setback from the central bank’s money tightening policies as their top-lines as well as bottom-lines have shown a much slower growth than their respective interest costs.



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