India is a shining star in an otherwise dark night that the global economy is currently courtesy its stellar rate of GDP growth. Official data released yesterday showed that the economy grew 8.6% YoY in the March quarter of 2010. A pointer to the fact that there is indeed reason to substantiate the optimism with regards to the recovery. Infact, after the announcement of the GDP number, the Finance Minister Pranab Mukherjee went as far as to say that growth momentum would continue. And the GDP would grow at a pace faster than 8.5% in FY11.
While this is all good and gives investors and companies reason to cheer, an interest rate hike may nonetheless be just around the corner. As per reports, deputy governor of the RBI, Subir Gokarn, is reported to have said the RBI will not move away from the monetary policy tightening path and interest rates will rise in the coming months. Some in corporate India fear that further monetary tightening in the face of global turmoil and the crisis in the Euro area may mean a break in the pace of India's growth. "Hiking of interest rates at this point in time will act as a break on the overall growth process" said FCCI President Rajan Mittal recently.
However, rising inflation back here in India serves to complicate matters. This is one compulsion that the RBI cannot afford to ignore. After these reassuring GDP numbers, all eyes will now be on the RBI's policy review which is slated to be on the 27th of July.
Companies play dangerous FCCB game again
As per recent reports, more than a dozen Indian companies have announced plans to issue FCCBs in FY11. Companies in general do this to access cheaper funds overseas, where interest rates are much lower. They also get to lock in their interest rate on these funds, and are protected even if interest rates were to inch higher here in India. However, one risk they do expose themselves to by choosing this route is that of forex. If the rupee appreciates going forward, it will be good for them. This as they will have to pay back lesser in rupee terms on maturity.
However, if the rupee depreciates form here on, it will be their nemesis. Something similar happened in FY08 when CFOs across the country were expecting the rupee to appreciate further and issued tons of FCCBs. What happened instead was the opposite of that. And huge losses followed. More so, the conversion feature became useless as share prices too collapsed. Companies are queuing to raise money through this tricky instrument once again. We can just hope that our companies' CFO's are a wiser lot this time around.