Why cost of capital could rise for Indian companies
Abhishek Upadhyay of ICICI Securities PD and Samiran Chakraborty of Citi warn that the cost of capital for Indian companies may rise due to tightening liquidity and delayed monetary policy transmission.
The cost of capital for Indian companies may be on the rise, according to experts like Abhishek Upadhyay, Senior Economist at ICICI Securities PD, and Samiran Chakraborty, Chief Economist for India at Citi.
Upadhyay forecasts that liquidity will continue to tighten, which could lead to an increase in the cost of capital as the effects of monetary policy are transmitted through the economy. “Liquidity will continue to tighten and rates will stay here. So it is possible there would be some tightening and as monetary policy transmission takes place, there would be some tightening in cost of capital,” said Upadhyay.
Chakraborty agrees, pointing out that while policy rates may have peaked, the transmission of these rates through the financial system is still incomplete. "I will agree with that perception; although policy rates might have peaked, the transmission is still incomplete," Chakraborty noted.
On October 6, the Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) kept the repo rate and policy stance unchanged. However, the RBI surprised the market by announcing a bond sales program known as Open Market Operations (OMO). Following this announcement, the yield on the Indian 10-year bond rose significantly, climbing to 7.35% from its previous close of 7.21%. The RBI clarified that the bond sales would be conducted through auctions rather than screen-based transactions.
This development is expected to adversely affect non-banking financial companies (NBFCs) by significantly increasing their cost of capital. OMO involves the sale or purchase of government securities in the open market by the central bank, which in turn impacts yields.
This move is expected to have a negative impact on non-banking financial companies (NBFCs), as it is anticipated to significantly increase their cost of capital.
Upadhyay added that the market's reaction to OMO will depend on both the size and the tenure of the operation. "Assuming that the size is anywhere between ₹10,000 crore and ₹15,000 crore, that pace is already factored into market expectations. Our own assumption is that the RBI will proceed cautiously. A steadier pace would likely be more favourable," Upadhyay stated
For more details, watch the accompanying video
(Edited by : Shweta Mungre)
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