MNCs are adopting innovative financing models to deal with rising interest rates in India
Since early 2022, RBI has increased interest rates by 250 basis points. As a result, the repo rate has been raised from about 4% to 6.5%. These hikes have driven up borrowing costs. This has, in turn, made Indian companies across sectors re-evaluate their financial and operational strategies. RBI, on the other hand, continues to increase the interest rates further in a bid to curb inflation.
Interest rates in India stand at 6.5% as of January 2025. The RBI has maintained this rate in successive meetings. Thus, following a conservative approach to handle inflationary pressures and economic growth.
Looking forward, there’s a sense the RBI may eventually cut rates sometime in February 2025. Consensus suggests that if inflation trends begin to favor a soft spot, the repo rate could drop by another 25 points in February ’25. This may be followed with a subsequent decline again in April ’25. Hence, it is possible that the interest can drop to 6% later in 2025 if the country’s economic conditions allow.
Effect of Higher Borrowing Cost
Rising interest rates have directly impacted corporate financing in India. Businesses now face a sharp increase in the costs of servicing debt. This is 30% more of the interest burden when compared to FY22 and FY24. The amount paid as interest is huge, increasing to ₹3.38 lakh crore in FY24 from ₹2.52 lakh crore spent in FY22. The new expenses are constricting the operational budgets. Thus, it is compelling the firms to choose only essential expenses and delay expansion plans.
In industries like real estate and construction, where high capital expenditure is a norm, the impact of higher borrowing costs is more pronounced. Companies like Macrotech Developers and Tata Motors are witnessing subdued demand. It’s because higher loan EMIs are deterring homebuyers and vehicle buyers.
Energy companies like Adani Green and Tata Power, which have high debt exposure, are also facing reduced cash flow. Thus, reassessing their growth plans to deal with increasing financing costs.
Strategic Changes in Corporate Practices
Indian companies are using several business strategies to reduce the effects of increased interest rates in the current scenario. One of the obvious trends is that of re-validation of capital expenditure plans. Businesses are getting more risk-averse, focusing on ideas that can give quicker returns with smaller huge initial outlays. This has also given rise to leasing as an alternative in capital-intensive industries to outright buy equipment. Thus, making cash flow management easier.
Cost management has also emerged as a critical focus area. Businesses are rationalizing operations, cutting unnecessary expenses, and renegotiating supplier contracts to stay profitable with thinner margins.
Financial restructuring is also gaining momentum. Indian companies are exploring debt refinancing options to lock in favorable terms before further rate hikes. Improved cash flow management practices are also being adopted to deal with increased operational costs and possible revenue slowdowns.
Sector-Specific Adaptations
The rising interest rates are impacting the supply and demand in the real estate sector. Developers are deferring large projects, and buyers are delaying home purchases because of increased loan EMIs. This is a double impact, creating a cautious market environment. Similarly, energy companies with high debt levels are finding it challenging to maintain their ambitious investment plans in renewable energy projects.
Since the lending rates are up, this increases the funding cost of the banking sector. This rises into a cycle in which businesses’ borrowing costs go up, further increasing the constraints on liquidity in the market. SMEs become the worst hit since they apply for loans offered under floating interest rates, increasing their exposure to financial stress. A one-percent increase in interest rates can reduce SME profits by an average of 14%. Thus posing a challenge to the sustainability and growth of most firms.
Alternative Financing Options
Many Indian companies are shifting towards alternative financing options due to rising borrowing costs. This is because asset-based lending allows a loan secured by physical or financial assets; hence, the companies find this a more flexible alternative to bank loans. Invoice factoring, on the other hand, involves selling the business’s unpaid invoices for cash; it becomes an excellent option to manage liquidity without increasing the debt.
Moreover, with peer-to-peer lending platforms, such as IndiaP2P, gaining popularity, competitors from the rates of interest to savings against traditional financial institutions are also contributing to the pool. Revenue-based financing provides much-needed funding to startups and small businesses with their future earnings rather than credit scores, which eases the uncertainty in economic times.
Multinational Corporations Customizing to Local Condition
India is not immune to rising interest rates and MNCs are reassessing strategies, too. A lot of focus is now being placed on local sourcing in operational efficiency to keep production costs down. Many MNCs are trying to offer customized products in India with lower variants in an increasingly price-sensitive market.
Distribution is one area where MNCs are adopting decentralized models to tap local entrepreneurs and reduce the cost of logistics. Others are looking at innovative financing models, including partnerships with local financial institutions, to mitigate the impact of higher borrowing costs.
Conclusion
The rising interest rates are forcing Indian companies to maintain prudence and innovation to stay buoyant. Companies are facing rising borrowing costs while focusing on cost optimization, alternative funding sources, and the review of investment plans.
While the Indian economy remains an uncertain environment, the strategic decisions show the flexibility and responsiveness of the Indian firms. The tough times will only help Indian companies learn how to handle growth and profitability within the fast-changing economic setup.
