MUMBAI, January 18: The latest diktat from the Reserve Bank of India (RBI) to suck out liquidity from the banking system has created confusion in the corporate sector. As the hike in bank rate and cash reserve ratio will lead to a general rise in interest rates, companies, especially non-banking finance companies, are in a fix over the emerging interest rate levels. This is expected to hit their fund mobilisation through fixed deposits and debt instruments.There is already an indication that the RBI measures are only temporary - that is till the rupee stabilises and the fund flow from the banking system to the foreign exchange market is controlled. Against this background, will the interest rate hike remain a short-term measure? How will companies (as at the end of March 1996, aggregate deposits of non-banking companies stood at Rs 2,95,344 crore) deploy funds and assure returns to investors?IDBI which had announced a Rs 1,500 crore Flexibond issue much before the RBI announcement has now decided to go ahead with the debt issue without revising the interest rates. This is only one incident. Over 200 companies had earlier firmed up plans to raise nearly Rs 25,000 crore in 1997-98. ``Now it is to be seen how many of them will see the light of the day,'' said a merchant banker who was closely involved with many debt issues.NBFCs - which now pay around 13-14 per cent interest rate on fixed deposits - are also in a dilemma. This is on top of the new NBFC norms which stipulate that companies should get minimum `A' rating for deposit mobilisation and companies without this rating will have to return the money already collected. With liquidity drying up very fast, NBFCs are not sure whether they will get money even after hiking interest rates.``Even if we hike the interest rate, we're not sure for how long the new RBI measures will continue. In the last two months, the RBI has taken several steps and withdrawn to arrest the rupee slide. This has confused us. It is difficult to predict whether the imminent interest rate hike will be long-term or short-term. We'll have to wait and watch to see what the RBI is planning. We can't ignore the claims of investors for higher returns also,'' said the chief executive of a finance firm.Even manufacturing companies - which offer around 11 per cent interest rate - are also in the same boat. The worry is that if the RBI withdraws the measures within two months there will be a problem in servicing the money borrowed at a higher cost. They point out that when interest rates shot up two years ago, investment in new projects was affected. Now with the capital market also in doldrums, there is no way companies can raise funds for expansion and modernisation.Apart from fixed deposits, fund mobilisation through debt instruments like bonds and debentures - mainly through private placement - will also be delayed. Many companies like the newly-formed IDFC (Rs 3,200 crore), National Housing Bank (Rs 500 crore), Tisco (Rs 1,000 crore), IRFC (Rs 1350 crore) had planned debt issues along with nearly 200 companies to raise over Rs 25,000 crore. If deposit rates go up, there is no way but to raise the interest rate on debt instruments. Here again, companies are now in a spot as they are not sure when the rates will start dropping again.Says Ajay Srinivasan of ITC Threadneedle: ``The Reserve Bank measures signal a reversal on the stance of interest rates. increasing the CRR, bank rate, fixed repos rate and the cut in general refinance will suck a good deal of liquidity out of the system, and send interest rates up across the maturity spectrum.'' Several experts are against high volatility in interest rates.``Common investors lose money in the stock market when shares become highly volatile. It should not be repeated in banking finance also,'' said a senior broker of the Bombay Stock Exchange.
