Corporate funding costs set to increase

HONG KONG/MUMBAI: When it comes to raising money, India’s fast-growing companies have found themselves stuck between a rock and a hard place as funding costs rise. And it just got worse.

On Wednesday, the central bank raised its key lending rate for the first time in more than a year, to pre-empt inflation that is forecast to rise above 9% - a 13-year high - this month.

Analysts said that following a rise in state fuel prices last week, further policy tightening would be needed. The Reserve Bank of India raised its repo rate by 25 basis points to 8%, the highest in nearly six years.

“The cost of financing in the Indian economy on average is likely to increase, which is not happening at a very good time given the fact there are signs of economic deceleration starting in the industrial sector,” said Sebastien Barbe, senior economist and strategist at Calyon in Hong Kong.
 
At a time when big Indian companies such as Reliance Communications are scouring the world for multi-billion dollar deals, analysts said the rising cost of funds could force many Indian companies to put expansion plans on hold. Otherwise, they will pay dearly to raise funds.

Lenders are already cautious because of the global credit crisis. Adding rising interest rates to the mix means lenders will demand more compensation for risking their capital.

For Indian companies, that adds to their costs when they are already feeling the squeeze from the soaring cost of energy and raw materials and a slow down in domestic demand.

Take Rural Electrification Corp. Just last week a company official told Reuters it planned to raise as much as Rs 1,000 crore in bonds, but bankers now say the electricity provider has postponed the offering indefinitely.

Selling bonds abroad is not a realistic option for most firms either, analysts say. The government last month eased curbs on overseas borrowing, but not to the extent to make a significant difference because the curbs remain too strict, critics say.

Indian companies are keen to borrow abroad because raising funds domestically tends to be as much as 2% above overseas borrowing rates, bankers say.

Other avenues to raise money will not prove easy either. Loan volumes have slumped as banks are more cautious about lending, while rights issues may prove a tough draw at a time when the BSE Sensex is already down over 25% in 2008.