Thursday, September 04, 2008

Rising interest rates? Not to worry!

Most forecasters have lowered their forecasts for Indian economic growth for 2008-09. The RBI thinks growth will end up slightly under 8%. The PM's Economic Advisory Council projects growth of 7.7%. Many investment banks think growth will be even lower.

These forecasts rest on two things: the adverse global economic environment and lower global growth; and rising interest rates in response to inflationary trends.

Yes, weaker global growth will moderate India's growth but higher interest rates, I think, are not such a big worry. This is the subject of my ET column, Interest rate rise not a big worry.

Why do I say this? Briefly:
  • Lending rates have risen but remain below levels in the nineties.
  • Corporate leverage is much lower than in the nineties, so higher interest rates do not threaten corporate profit to the same extent
  • Consumer borrowing has been impacted but housing demand should revive once property prices correct
  • Banks' capacity to make loans remains unimpaired despite four years of rising interest rates. Even NPA levels in the aggregate are not a problem because five years of high growth are causing past corporate NPAs to revive, far from adding to fresh NPAs in a big way.

1 comment:

Realty Rider said...

Fitch Ratings said the short-term outlook for India's real estate sector is negative with slowing demand and growing liquidity concerns, coupled with the tightening bias of monetary policy, leading to a possible negative impact on the credit profiles of real estate companies. But in Fitch's opinion, this slowdown will also aid the process of weeding out some of the weaker entities within the sector, and increasing the relative strength of some of the larger, more established developers. The rating agency, however, warned that the liquidity risks on account of significant bullet repayments falling due during the course of 2008 remain a key challenge across the board. Larger, established and well-capitalized companies with access to banks/financial institutions would remain better positioned to manage this risk, while smaller players may end up either refinancing these at materially high rates of interest, or could default on their obligations, it said.For more view-