Illustration: Ajay Kumar Mohanty
According to the Reserve Bank of India’s (RBI’s) State of the Economy report released on Tuesday, corporate India must come together to take advantage of lower borrowing costs to incur capital expenditure (capex) and relieve the government of heavy work. .
The report, authored by RBI staff including Deputy Governor Michael Debabrata Patra, expects current liquidity conditions to ease on the back of government spending and inflation expectations to decline, while noting that unsecured loans continued to grow despite an increase in risk weighting.
“Overall, businesses should take advantage of the space freed up in financial markets by a lower budgeted lending program and the easing of borrowing costs that has already begun in response to the 2024-2025 interim budget, driven by capital investments and consolidation,” the report said. It clarified that the views expressed in this article were those of the authors and did not represent the views of the RBI.
It noted that India Inc’s balance sheets were healthy thanks to strong profits, with debt levels remaining constant or improving and the return ratio at its highest level in several years. The report noted that fixed asset growth was evident in the oil and gas and chemicals sectors. However, in sectors such as steel and automotive, where equity returns have exceeded index returns, additions to fixed assets have been disappointing.
“Expectations are growing for a new round of corporate investment to take over from government and drive the next phase of growth,” the report said.
According to the report, the energy sector’s investment plans are the most ambitious, but leverage among distribution companies is high.
“Yet India has made great strides in the green energy sector over the past decade, with renewable energy accounting for 43 percent of total installed energy capacity. Businesses should use this to expand investment, especially with the aim of tripling renewable energy capacity to 500 gigawatts by 2030,” the report said.
The report highlighted that the banking and financial sector maintained strong profitability growth thanks to still growing credit demand in the economy and lower provisioning costs.
In this context, the report states that banks’ unsecured loans have grown despite the hit to capital due to the increase in risk weights.
In November, the RBI increased risk weights for unsecured loans such as personal loans and consumer durables from 100 percent to 125 percent. While the risk weightage for bank credit cards was increased from 125 percent to 150 percent, it was increased to 125 percent for non-banking financial companies (NBFCs). The regulator has also increased the risk weights on bank loans to higher rated NBFCs (A and above) by 25 percentage points.
According to the latest RBI data, banks have extended loans worth Rs 59,040 crore to NBFCs and Rs 37,222 crore under the ‘other personal loans’ category between November 17 and December 29.
The report also highlighted pressure on banks’ net interest margins in the coming days. “The delayed effect of the pass-through of policy rate increases to interest rates on deposits and certificates of deposits put pressure on net interest margins.”
The report sounded optimistic on the inflation front as it sees inflation expectations easing while warning of renewed pressure from grains and proteins.
“Overall, inflation developments are also turning favorable, creating a stable environment for companies to plan expansion strategies in anticipation of a pick-up in demand,” the report said.
“With consumer price inflation no longer reaching the November-December peaks in January 2024, inflation expectations may stabilize and decline, although renewed pressure from grains and proteins cannot be ruled out,” the report said, adding that core inflation is at its was the highlight. lowest since October 2019 and wholesale price inflation for the non-food sector remained deflationary.
“This should bode well for the outlook for manufacturing companies’ input costs and selling prices,” the report said.
Commenting on liquidity conditions, which tightened again in line with the government’s cash balance build-up in the second week of February, the report said liquidity conditions would ease due to government spending. “Going forward, rising government spending is expected to ease liquidity conditions,” the report said.
Striking observations
India Inc’s balance sheets are healthy thanks to high profits
Pressure on banks’ net interest margins in the coming days
Current liquidity conditions will ease government spending
Core inflation is at its lowest level since October 2019
Wholesale inflation in the non-food sector remained negative
First print: February 20, 2024 | 11:48 PM IST