With the Reserve Bank of India,  having hiked repo rates by 50 bps to 9 per cent and the cash reserve ratio by 25 bps also to 9 per cent, will banks hike their lending rates now?

S Narayansami, chairman and managing director, Bank of India, feels banks will definitely look at revising interest rates now. "We may have to hike lending rates by a full 50 bps. It is going to affect the bottomline of banks. We will have to go for a minimum 0.5 per cent revision in PLR, or Prime Lending Rate, for the time being. It is evident that money has been made very dear and expensive. The whole idea is to contain aggregate demands. These measures will make India the best climates to invest in the medium-term."

Ananth Narayan, head-global rates, Deutsche Bank, feels RBI is sending out a strong message that aggregate demand has to be curtailed. "Aggregate demand being where it is produces an oil, fertiliser, plastics, and petro-chemicals bill, which is not sustainable. The main question is what happens to oil bonds."

Narayan said there would be concerted action on the liquidity front. "I cannot see liquidity being eased up."

Sunil Kalra of Citigroup said that while the document maintains its hawkish stance, it has recognised a bit of a slowdown in basic intermediate goods as well as in the industrial and manufacturing sector. "With inflation well into double digits, the hawkish stance will probably continue and override the slowdown, if at all it seems to be persistent. The tone is laying more emphasis on inflation and monetary aggregates being over-targeted while recognizing a few signs of slowdown. They already do recognize the fact that there is a slowdown in the rate hike. It is probably not going to make things easier for the industry and the corporate sector."

According to Kalra, the rate hikes would drain Rs 8,000 crore more out of the system. "This is not a very significant drain in terms of total liquidity situation of the market. The signal is clear that the intent of RBI will be to keep liquidity conditions pretty tight."

Chanda Kochhar, joint managing director and CFO, ICICI Bank, said in the process of achieving 8 per ent GDP growth and near 7 per cent inflation by March 2009, if the economy has to go through some amount of pain, one has to accept it and move forward. "India could achieve 8 per cent growth and 7 per cent inflation till March 2009 there will be positive results because of these measures."

She observed that the tightening measures do make the market react much more conservatively. "The market builds some of this in as a reaction on the interest rates. You could see a regime of high interest rates for some time. If the cost goes up, the lending rates would go up."

Kochhar is hopeful that growth will continue since investments are still taking place. "If we expect GDP to grow at 8 per cent, credit can grow between 15 per cent and 20 per cent for sure. I do not see too much of an impact on credit so far. We need to watch out for the impact of repo rate and CRR hike on market rates. If market and deposit rates increase, then lending rates will also increase. But we will have to wait for a few days to see the impact of these rate hikes."

M D Mallya, chairman and managing director, Bank of Baroda, does not feel there is a need to hike deposit rates, but there is a possibility that lending rates will be increased. "It is only a caution given by RBI that given the present market conditions one needs to be cautious as far as credit expansion is concerned. For the industry as a whole, credit expansion was around 24 per cent. Therefore, the guidance given by RBI that the overall credit expansion is in the range of around 20 per cent, which has been appreciated by banks."

As far as Bank of Baroda is concerned, he said the credit expansion in Q1 was around 4 per cent over the March 2008 levels. "Even in our corporate goals for the current year we had estimated that credit would expand by about 20 per cent-22 per cent. As far as credit monitoring aspects are concerned, we have already taken care to see that the asset quality is maintained at good levels."

These measures are going to make corporate lending dearer. It may also hit the capex plans of most companies. So, what do corporates read into these RBI measures?

Ravi Kumar, chairman and managing director, BHEL, said the company being cash rich won't be impacted by RBI move. "As far as our customers are concerned, there will be some variable rates, so project costs are likely to go up. There will be an impact on net costs. There will be some impact on orders, but it will not be significant as far as power sector is concerned, because there is huge demand and supply gap. So, the order backlog and booking will not come down much. Our material procurement cost is also likely to go up because there will be some borrowing by different vendors for their operations. There will be an impact as far as variable costs are concerned for our different customers. So, the affect will be neutral on this issue."

Y M Deosthalee, chief financial officer, L&T, said there was an indication of interest rates going up. "The central bank is saying they want to control inflation and do not mind if growth comes down, which indicates that banks will be inclined to increase interest rates. If the interest rates go up, the sectors which are going to be affected immediately are the housing sector, retail, automobiles, and all those who are directly connected with the retail business."
"As far as long-term expansion is concerned, I maintain that corporates which are increasing capacity for long-term and are looking at a global view of the demand-supply situation. Companies may not postpone their decisions because of a 25 or 50-bps increase in the interest rates. Therefore, that plan should not get impacted by interest rates increase."

Vyomesh Shah, managing director, Akruti City, said the rate hike will definitely control inflation, but will definitely have an impact on the demand side of the real estate residential sector.

On his company's plans, he said they Akruti has planned to raise  funds after the annual general meeting approves it. "Till then, there is no plan to raise it. We have a one-year window after that. It is an enabling provision, which we have tried to obtain for ourselves."

With respect to where rates will move for the real estate space, Shah expects that it should move up by another 50 to 100-bps.

Venu Srinivasan, chairman and managing director, TVS Motor, said the immediate impact would be on economic growth that will slowdown to less than 7 per cent. "I don't think it will reach 8 per cent -8.5 per cent as the governor stated. Money supply will be squeezed and consumers will have less money in their hands to spend."

He expects demand, which has been growing at 10 per cent in the first quarter, to taper off to low levels of single-digit growth. "Except motorcycle or two-wheelers, growth will come down to about 2 per cent from the current 10 per cent which we have witnessed last quarter.''

He said capital expenditure would be postponed in the automotive industry as they already have excess capacity. "Dealers commission will also be squeezed. We did about Rs150 crore capex last year and will cut it by 50 per cent this year."

Rate hike impact on Retail
Larger retailers have tied in their capex for next eight-twelve months. The first casualty of the rate hike would be that the expansions in tier 2 and 3 cities will be curtailed. Smaller retailers already feel the pinch of the rate hike while some may be forced to shut shop going futher. Going forward, it will be difficult to fill up malls if smaller retailers defer expansion plans.

Rate hike impact on SME
SMEs are not in the pink of their health as they do not have negotiating muscle of larger companies. The auto units in Pune-Nashik have already deferred expansion plans due to the rate hike.

Rate hike impact on Real Estate developers
Developers                 Sep '07   Dec '07  Mar '08

DLF                              0.38      0.48          0.49
Unitech                         1.52      1.36          1.96
Parsvnath                      0.57      0.70          0.74
Puravankara                 -0.05      0.26          0.51
Omaxe                          0.40      0.83         1.12
Ansal Properties            0.47      0.54          0.57
* Trend of Net Debt/Equity over three quarters

For developers, consumer interest may fade and home loans will become dearer. Floating 20-year home loans average is at 11-11.5 per cent.  Apart from that, the borrowing costs will increase. As of now, DLF borrows at 11.5 per cent, Unitech at 13 per cent, others up to 19 per cent. After the rate hike, they will have to  pay more for executing projects. Property sales will witness a  slow down. As of now, home loan growth rate has been flat at 20 per cent for two consecutive quarters.

Rate on infrastructure companies
For the infrastructure companies, higher interest rates means higher base costs on their projects which will put pressure on their margins. Credit may be difficult to get which may result in project delays. Infrastructure companies who still have fixed priced contracts will have to bear costs of fixed priced contracts.

Fund raising for infrastructure has lower risk weight as compared to realty. Public benefit projects get concessions. Therefore, the effect will be less on infrastructure as compared to real estate.