Funds become costlier, demand will get hit

Indian companies would have expected some action from the RBI to hike lending rates, but the pace of change must have left them worried. The RBI has hiked the repo rate –the rate at which RBI lends in the interbank market- by 50 basis points to 8.5% and has hiked the cash reserve ratio –the portion of deposits kept in reserve by banks- also by 50 basis points.

The first measure is effective immediately and the second will be done in phases in July. The cumulative effect of this move and the earlier one by the RBI (on June 11, repo was raised by 50bps) will lead to a hike in interest rates. Companies will get hit as working capital funds will become more expensive and new projects will find that debt has become costlier.

Consumers especially home buyers will find the going rough, while interest rate sensitive sectors like auto and durables will find consumers getting squeezed. The impact on these sectors will be visible in the coming months. June may just well be the last quarter of a relatively good show by companies.

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