RBI rate hikes affecting debt serving:Crisil

Mumbai: Crisil Ratings today said the repeated interest rate hikes by the Reserve Bank and lower operating profits on the back of high input cost have pulled down India Inc`s interest paying ability to a five-year low. Even though the Reserve Bank has now hinted at a pause to its rate hike cycle, Crisil says it expects the interest coverage ratio to remain under pressure on the back of a dip in overall growth expectations.

In the September quarter, interest costs for companies grew 36 percent, bringing down the interest coverage ratio to 4.8 times versus the 7.8 times in the year ago period and a five-year average of 8.4 times, a study conducted by the agency`s research arm reveals. At the lower end of the spectrum, companies with an interest coverage ratio below two times rose sharply to 117 in the July-September period from 69 in the same period last fiscal, it said.

"While interest coverage is still healthy at 4.8 times, the magnitude of drop over the past few quarters is high," Crisil`s chief executive and managing director Roopa Kudva said. Uncertainties in the West and lower GDP growth domestically will push India Inc into a slower revenue growth phase which could increase the pressure on profit and further deteriorate interest coverage ratios, she added.

The central bank adopted a unilateral strategy of attacking the inflation number and successive hikes saw the repo rate–at which it lends to the system–growing from 5 percent in March 2009 to 8.50 percent in December 2011. While the headline inflation number continues to be elevated, the hikes have ended up impacting growth as investment activity slowed down.

The government and RBI have been repeatedly revising down GDP forecasts for the fiscal and recently Governor D Subbarao had raised doubts if the economy will achieve even the 7.6 percent projected by him earlier. The Crisil study also says after a gap of 8 quarters, the September quarter also witnessed a decline in the operating profit and reported profit after tax by companies. Commenting on a sectoral basis, the capital markets director at the research arm Tarun Bhatia said FMCG, information technology and pharmaceuticals fare better on interest coverage while companies in the real estate and infrastructure are the laggards.