I was just watching one of the news piece in Bloomberg UTV titled rewind 2011 which was showing a crisp state of affairs as to how did the various sectors perform and trust me guys after watching that story was so gloomy for a couple of hours that I thought my job is in one of the most vulnerable sector (banking). According to that news story nobody had performed well barring the FMCG sector. Almost all of them had some problem or the other- labor, consumer, government, raw material or sentiments but the most common amongst all of them was rising INTEREST RATES, and this made me more curious to know that how can this one common denominator screw up things so badly that almost all the sectors end up in red.
Read some papers, googled a few doubts and ended up in a flow chart kind of a thing. When I read the flow chart for myself I realized that it has a big ripple effect and can rightly make lot of sectors bloom or mar the growth of it altogether. No industry or for that matter even GOI say that they are insulated from the interest rate spikes (Even the housewives income from pick pocketing her husband’s wallet had declined because there is no money anyways :( ).
Let’s first see some major holes which the rates have punched in, in India Inc :
• Higher rates have increased the cost of capital and thus decreased the ROE.
• Increased costs have made many projects economically unviable for time being so either they have been shelved altogether or at least postponed for time being.
• As a result of higher debt servicing cost, the defaulting list amongst India Inc has increased causing either rating downgrades or NPA’s to banks.
• Corporate who are still bearing the cost have to cut down their other expenses to carry on and thus downsizing and cost reduction takes place.
• Inorganic growth has come to a standstill because no one now claims to be cash rich or even if one is they are not sure how much adversely can it affect if the books of the acquired company have a sizeable portion of debt in it.
Read some papers, googled a few doubts and ended up in a flow chart kind of a thing. When I read the flow chart for myself I realized that it has a big ripple effect and can rightly make lot of sectors bloom or mar the growth of it altogether. No industry or for that matter even GOI say that they are insulated from the interest rate spikes (Even the housewives income from pick pocketing her husband’s wallet had declined because there is no money anyways :( ).
Let’s first see some major holes which the rates have punched in, in India Inc :
• Higher rates have increased the cost of capital and thus decreased the ROE.
• Increased costs have made many projects economically unviable for time being so either they have been shelved altogether or at least postponed for time being.
• As a result of higher debt servicing cost, the defaulting list amongst India Inc has increased causing either rating downgrades or NPA’s to banks.
• Corporate who are still bearing the cost have to cut down their other expenses to carry on and thus downsizing and cost reduction takes place.
• Inorganic growth has come to a standstill because no one now claims to be cash rich or even if one is they are not sure how much adversely can it affect if the books of the acquired company have a sizeable portion of debt in it.
If I jot down a few sectoral impacts, following are a few which have got impacted the most:
• The Auto industry coupled with higher fuel prices, has got hit the most with an increase in rates, as people now have to fish out more by the way of equated monthly installments’ as most of the lenders have a fixed interest rate for this product, and interest rates being at all time high people tend to differ the purchase to favorable rates unless and until you badly need a car. This fact can be substantiated by the sheer fact that the passenger car segment saw a third of growth this year when you compare it with the last year. Also the number of new launches from various auto makers has seen a sharp fall when compared to last year.
• The second biggest impact has been seen by real estate. Considering the fact that most individuals in India buy a house with a bank loan the sector has a direct impact from higher rates. Just last FY when most of the banks were quoting 8 to 9 % rates for their HL product people had qued up to buy houses and so were the developers for launching one product or other but now with the rates quoting at 13-14% levels the very feeling of more than half of salary getting mopped away by banks dampens the wish of buying houses. The fact again can be substantiated when you see lot of projects getting slowed down and no takers for them because the developers don’t have money either an borrowing at the rates of more than 20% and with flats unsold doesn’t lure them as well.
• Though FMCG and lifestyle goods have not ended up in red but still the growth could have been way better. The impulsive shopper was missing for the entire year in India because there was no money left with him anyways to buy anything with impulse .A lion’s share of his shopping budget have already been slashed by the higher EMI and inflation.
Did it affect the GOI? Oh yes!!! It did and it did in such a way that all the policy making and the foreign reserve fundas went for a toss, the easiest way I comprehended was:
• Higher interest rates dented the P&L of India Inc and thus even PSU’s were not spared and by the virtue of which one of the stream of revenue dampened.
• One of the biggest source of revenue for govt. : TAXES and DUTIES saw a sharp fall and any good reasons for it? Yes I have the simplest of all, when you have less profits you pay less taxes and this is what happened with almost every company this year, all of them have to re look at their earning forecast and most of them claimed pay back of their advance taxes paid. Lesser sale of imported goods led to lesser import duties, lesser production led to lesser excise and to top it all influx of corruption did the rest to nail the coffin of higher than ever current account deficit which stands at staggering 86%. This all cumulated and gave India Inc the worst of the shocker: DOLLAR @ 54/-.
Last but not the least, how did it affect you and me????
• Higher rates left fewer amounts in our pockets and denting our savings.
• The existing investments in Equity got ruined because of the sharp fall in Equity markets( some foul play of the western world can also share the blame for this point)
• When profits donot rise for companies the best bet it to save cost and when it comes to saving costs, gifting PINK SLIPS is the best option :(
• Cannot afford a lot of aspirational products at this point of time because pocket doesn’t allow.
I know that after reading this most of you must be cursing me for ruining the entire feel good factor. You may do so on the comments section :)
