The RBI had reduced the policy rate by 135 basis points (bps) in 2019 and, continued it with further cuts totalling 115 bps till September 2020 in order to spur economic growth. Despite the measure, the interest expenses of the large companies (Nifty 50 index) increased 9.8 per cent year-on-year (YoY) in the June quarter, largely led by Reliance Industries Ltd (RIL), whose interest cost surged by ` 1,626 crore, or 31.8 per cent YoY, in Q1 FY21. Similarly, NTPC and L&T’s interest burden surged by ` 608 crore and ` 495 crore, respectively. The borrowing costs of the Nifty 50 companies, except RIL, banks and finance companies, increased 5.3 per cent YoY.
Factors of Surge in Borrowings
Increased borrowing is one of the leading factors, for instance, RIL had a total debt of ` 3.36-lakh crore as on March 31, 2020, up 15 per cent from the previous year. The total consolidated debt of NTPC, L&T, Tata Steel, and Mahindra & Mahindra also rose 15-17 per cent in FY20. Firms borrowed further, in the June 2020 quarter, to bridge the liquidity gap created by the dip in revenues due to the pandemic. The larger companies resorted to lending money to their vendor ecosystems. Besides, the prolonged delays by the government, in the infrastructure and allied sectors, could have worsened the liquidity conditions for corporates.
Fluctuations in Foreign Exchange
Fluctuations in foreign exchange played spoilsport for companies that rely on foreign borrowings. The rupee was over 9 per cent weaker in the first quarter of FY21 compared to the first quarter of FY20. Tata Steel saw an 11 per cent rise (nearly 52 per cent of its debt is in foreign currencies) in its interest expenses in the first quarter of FY21. The commissioning of certain projects, such as the gasification business (RIL) and Hyderabad Metro (L&T), resulted in lower capitalisation of interest during the Q1, which moved the interest expense to the profit and loss account.
Slow Transmission of Rate Cuts
The RBI’s rate cuts did not entirely transmit to corporates, except for companies with strong credit profiles. This phenomenon substantially began after the IL&FS crisis. Expectedly, the impact of the rate cuts will reflect on the interest costs from the second half of FY21. As for the other steps taken by the RBI, including moratorium granted on term loans, that also could not ease the pain since accounting continues to be on an accrual basis and the moratorium was only a deferment of interest payments until August 31.