Infrastructure sector look for smooth road post rate cut

A surprise repo rate cut of 25 basis points by the central bank last week is likely to provide a shot in the arm for the country's troubled infrastructure sector, which is facing tough times over the past few years with higher interest rates being one of the many challenges keeping companies on the back foot. RBI's move, which also signalled that inflation is on a mend, appears to have shifted its focus towards growth, indicating that infrastructure would be a major beneficiary in a softening interest rate regime going ahead, say market experts. Most of them are of the opinion that this is a first in line of more rate cuts to be expected in the future.

Deven Choksey MD at KR Choksey, said, he expects the rates to be cut by 2% over a period of two years. Citing an example, Choksey said that assuming Rs 5 lakh crore is spent on road infra projects, of which Rs 4 lakh crore has been through debt, a two percent cut in interest rates will help infrastructure companies save around Rs 8,000 crore a year.

Isaac George, director and CFO GVKPIL, said, "The infrastructure companies will be able to reap the benefits of the rate cut by the RBI provided the banks pass it on to the corporate lenders."

With interest rates coming down, the highly indebted infrastructure sector will get a boost as the borrowing cost of companies will come down. This will consequently improve the internal rate of return on the infrastructure projects, said George.

The companies providing infrastructure services will also be in a position to pass on the benefit to its users. Infrastructure companies who had postponed their borrowing decision will be in a position to start the projects.
The recent proposal of the government to take up pending projects worth Rs 3 lakh crore will give a much needed boost to the infrastructure sector with major infrastructure-related bills like coal and land acquisition being passed through the ordinance route. It needs to be seen if the bills are successfully passed in both houses of the parliament.

Also the 5:25 scheme by the RBI wherein the tenure of the infrastructure loan is increased to 25 years with an option of refinancing the loan every five years is acting as a supplement to the government efforts, believes G Chokkalingam, founder & managing director, Equinomics Research and Advisory.

The 5:25 scheme will help banks reduce the mismatch between their assets and liabilities. In turn, the infrastructure companies will get the much-needed long-term loans, as the gestation period for the projects is high.

M K Sinha, managing partner and CEO at IDFC Alternatives asserts that fundamental reforms such as liberalising investment norms for pension funds to invest in infrastructure projects will also aid long-term growth of the sector.