Tatas in Ambanis, Adanis and Birlas – the fortunes of these highly indebted companies could change after rate hikes

• The Indian business sector has been enjoying low interest loans for almost four years now, but that will soon change.
• India’s central bank has announced two interest rate hikes – the first after 2018, as it seeks to control inflation.
• As a result, banks have already raised interest rates on loans which could cause problems for the Ambanis, Tatas, Birlas and Adanis of India.

The low rate regime is over and India’s central bank could not have said it any clearer after announcing two rate hikes in one month. “Globalized” inflation, as RBI Governor Shaktikanta Das called it, snowballed into a major crisis, forcing central banks around the world to prioritize inflation control over inflation. to growth.

This could play a big spoilsport for companies that have racked up huge debts – which includes all of India’s big business houses, which have bet on both organic and inorganic growth.

For nearly four years, the Reserve Bank of India did not raise interest rates, but the Russian-Ukrainian war and subsequent Western sanctions on Russia drove up prices for crude oil, foodstuffs and other raw materials.

Although there are many companies in India with no or low debt – some examples include giants like Maruti Suzuki and TVS Motor, apart from Bayer Cropscience, Bharat Electronics, among others – most major Indian companies have taken a considerable amount of debt.

Here are the borrowings of some of the leading trading houses in India:

Source: Company reports, data as of March 2022.

Notably, companies engaged in the IT sector generally have little or no debt, while those in infrastructure and other capital-intensive sectors have accumulated huge debt.

For example, Tata Motors and L&T stand out for their debt assumption of INR 1 lakh crore – between the two they hold 20% of the total debt of the seven business groups combined.

Will external commercial borrowing accelerate further?

External Commercial Borrowing, or ECB, has fallen by a third due to Covid, but is accelerating again.

With India’s central bank raising rates twice a month, companies may have an incentive to borrow from foreign lenders.

India’s richest men Mukesh Ambani and Gautam Adani already make up $1 out of $5 ECB.

BCEs are a cheap source of funds, allowing Indian businesses to tap into overseas markets with cheaper interest rates to finance their working capital, capital expenditure, expansion or other financing needs. The ECB’s path allows companies to reduce their overall cost of debt, which plays a critical role in an entity’s financial performance.

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Mukesh Ambani and Gautam Adani account for $1 in $5 of foreign loans

The Indian business sector has been enjoying low interest loans for almost four years now, but that will soon change. India’s central bank has announced two interest rate hikes – the first after 2018, as it seeks to control inflation. As a result, banks have already raised interest rates on loans which could cause problems for the Ambanis, Tatas, Birlas and Adanis of India.

With interest rates soaring in India, companies could use BCE to refinance their debt and reduce their interest charges.

Borrowing is already getting more expensive

The repo rate is the rate at which the Reserve Bank of India lends money to banks. A rise in the repo rate increases the cost of borrowing for banks, which in turn is passed on to borrowers like you, me and even businesses.

When money becomes more expensive to borrow, consumers and businesses reduce spending, which lowers demand and, therefore, inflation.

A side effect of this is that companies will have less money at their disposal, which could impact their growth and harm the overall growth of the economy.

All the banks have already raised their lending rates. For example, mortgage rates jumped to between 7 and 7.8% as banks passed on the higher cost of borrowing to RBI.

Additional rate hikes are expected to be announced in the coming days, reflecting today’s repo rate hike of 50 basis points to 4.9%.

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