For the CFO, the era of cheap capital has ended almost before it began. It was only in October, 1997, that the former Reserve Bank of India (RBI) Governor, C. Rangarajan, announced a 1-percentage point cut in the bank rate and a series of phased reductions in the cash reserve ratio (CRR) in an attempt to provide monetary fuel to a sluggish industrial recovery. Barely three months later, his successor, Bimal Jalan, executed exactly the reverse manoeuvre in an attempt to muzzle a volatile rupee.

Predictably, apart from arresting the slide of the rupee, the 200-basis points increase in bank rates from 9 per cent to 11 per cent, and the rollback of the CRR cuts has resulted in a uniform hike in prime lending rates, ranging between 1 and 2 percentage points.

Has the RBI sacrificed domestic economic growth for external stability? Yes, according to a BT-AIMM Research poll of 50 CEOs in five cities. An overwhelming 74 per cent of those polled believe that rising interest rates will delay the industrial recovery. Says B.B. Bhattacharya, 54, dean (research), Indian Institute of Foreign Trade: "For the time being, the interests of the domestic industry have been given the go-by in defence of the rupee."

To be sure, the lowering of the interest rates in October, 1997, had not exactly sparked off a rush for bank borrowings. For instance, the growth in the banks' non-food credit was a modest 2 per cent between October and December 1997, indicating that the actual cost-push impact of the increase in the interest rate could be marginal. But that, sadly, is not the case. All through fiscal 1997, corporates accessed an increasing share of bank funds through commercial paper besides bonds and bridge loans. The RBI's credit squeeze pushed interest rates on commercial paper from a range of 8 to 9 per cent in September, 1997, to between 14 and 15 per cent in January, 1998.

Even the option of foreign currency borrowings--which industry resorts to when domestic interest rates move up--is virtually non-existent today. Given the volatility in the foreign exchange market, the RBI's interventions notwithstanding, the six-month forward premia now ranges at around 15 per cent. No wonder 78 per cent of the CEOs polled expect their interest cost to increase more than marginally while 42 per cent do not see an opportunity to switch to external borrowings. Explains Vivek Sett, 43, director (finance), Ispat Industries: "Foreign currency borrowings are not attractive because of the high volatility and the high forward premia."

In a demand-buoyant economy, industry would have been able to pass on at least a part of the additional capital cost burden to the consumer. But sluggish demand and intense competition have shut all such safety valves. Fears Keki N. Wadia, 54, senior deputy managing director, skf Bearings: "Corporates will not be able to pass on the additional cost burden in the current competitive scenario." His apprehensions are echoed by 66 per cent of the respondents, who expressed their inability to pass on the additional interest cost to their consumers.

Squeezed between slack demand and the rising cost of capital, industry is hoping that this credit squeeze will only be temporary. As many as 78 per cent of the CEOs expect the hike in bank rates to be rolled back soon. If anything, the industrial slowdown will force Jalan to look beyond the rupee.

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