Business and high interest rates

Inflation may have fallen to a two-year low of 3.52 per cent following some tight monetary policies by the Indian central bank that is Reserve Bank of India(RBI), but a similar drop in interest rates is still not in slight in the near future.

Both economists and analysts do not expect any downward revision in loan rates as the demand continues to be strong because of rising personal incomes. This means debtors and fresh borrowers will not have any respite from the high rates ruling at present.

Chances of an interest rate cut may seem much higher when there is a slowdown in production and infrastructure. But in reality this is not plausible for the next few months when demand will pick up due to the upcoming festive season. Festivals in India falling in the next few months continuously such as Id, Durga Puja or Dashera, Diwali and Christmas are expected to raise demand and the economy would gain further in momentum. There has been a moderation in demand. But demand continues to be strong, overall because of rising incomes.

There are some banks that have affected a nominal cut in interest rates and deposits. This was done by those individual banks that saw a strong indication of a moderating demand in the economy.

The RBI’s reluctance to the cut rates shows that inflation may start rising again if loans are made cheaper. The only concrete direction India would get is after the US Fed cuts interest rates in its September meet. Also it’s the high oil and commodity prices which are still a matter of concern, despite inflation coming under control.

Oil touched $80 per barrel. The apex bank would maintain status quo in the interest rate regime as we see a corresponding overall economic scenario globally and in India. Even CRISIL opined that the RBI would pursue a wait and watch policy and the tight monetary stance will not moderate immediately.

An important Government of India’s advisor clarified that the decision on interest rates, if any should be followed by a continuous observation on cooling price situation. This may mean price trends have to be well established before reducing interest rates.

High loan rates still impacting industry:

Many industry players admitted that the slow down in economic growth was building up. Higher interest rates are denting sales of cars, trucks and motorcycles, which dropped in three of the first four months of the current fiscal year. Bike motors Hero Honda and Bajaj continued with production cuts as consumer demand waned. Maruti’s MD commented that higher interest rates were impacting everyone and said the company may fall short of the record 20 percent sales growth it achieved in last fiscal.

It should now be the efforts of government to tame the inflation within the limit of 3 percent so that price rise is completely contained.

The CEO and CFO play a very important role in any organization under the high interest regime. The strategy to do this is by managing financial stability and security.

There will always be some difficult times, when money does not come into a treasury. Even during these times the finance in concert with marketing must accelerate collection of outstanding dues and if required advance collection from credit customers by offering them appropriate market or trade discounts and keep the business going. This is a major challenge for any organization leader.

Money may keep flowing into an organization, but it also goes out at double the speed it comes in! Controlling this outflow is possible only if the CEO/CFO plans in advance.

One very important aspect of financial management is to continuously learn. It starts from the capital requirement stage, and then comes the short-term ‘running capital’ requirement, and if not tracked well there could even be a debt stage which can prove fatal for the organization. Good organization always budget out their expenses from time to time. There will be times when expenses exceed what has been budgeted. However, one becomes aware of how much extra has gone out. This is better than not being aware at all.