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Mumbai, July 29 Corporates are bracing themselves for tough days ahead, with the Reserve Bank of India’s ‘anti-inflation’ credit policy signalling higher borrowing costs for India Inc.

Large companies will have no choice but to follow through their plans, though fresh capacity-expansion plans may be put on hold. But taking the worst hit will be small and medium sized companies, say a cross-section of corporate India.

The RBI in its credit policy raised its key lending rate by 50 basis points to a seven-year high of 9 per cent, besides increasing the cash reserve ratio, or the proportion of funds that banks keep as deposits with the central bank, by 25 basis points to 9 per cent.

The apex bank is deeply concerned about rising inflation and seems to be saying that it does not mind sacrificing growth for price stability, observes Mr Y.M. Deosthale, Chief Financial Officer (CFO) with Larsen and Toubro.

It is clear there will be an increase in interest rates, as banks will have little choice. Small and medium industries will be the worst hit.

They may not be able to pass on the entire additional burden to their customers.

Large corporates are unlikely to change their long-term investment decisions. For them, a half or one per cent increase in interest rates may not matter when it comes to long-term plans, he said.

Housing and related industries such as cement and steel will be affected. Housing is price sensitive to interest rates. Corporates will face some constraints in raising additional funds, he added.

“It is going to impact volumes. Sales will get tougher,” said Mr Ramesh Iyer, Managing Director of Mahindra Finance, the financial service arm of the auto major Mahindra & Mahindra.

“What we want to do now is to restrict our amount of finance. The vehicle loan rate, size and period are going to shrink,” he said.

“This is perhaps the first time we confront a situation where the vehicle cost, the operating cost and the acquisition cost are going up simultaneously. In the immediate future there would be some slowdown. However, if the automobile manufacturers, financiers and dealers come together there will be some scope for salvaging the situation,” he added.

“This is certainly not a good sign for the industry as it would slow down the economy. With 55-65 per cent of two wheelers dependent on finance, it would have an impact,” said Mr Ravi Sud, CFO, Hero Honda.

Cipla’s Chief Executive Officer, Mr Amar Lulla said that the latest policy initiatives add to an already grim economic scenario.

Margins are under pressure, with inflation eating into profitability. It is not easy to reverse capacity-related plans, only that new plans may be put on hold by companies.

Cipla, for instance, will push ahead with its Rs 950-crore expansion plan announced last year, he said.

Giving the impact on IT companies, Mr N. Chandrasekaran, TCS’ Chief Operating Officer and Executive Director, said “What remains to be seen is the impact of these measures on the Indian currency.

From the IT industry’s perspective, we hope that this leads to reduced volatility in the exchange rates.” .

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