India Inc may not even need a Fed rate cut

A solar power plant in Tuticorin, India, on Wednesday, March 20, 2024.

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This report is from this week's CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big companies behind its meteoric rise. Do you like what you see? You can subscribe here.

The big story

Emerging markets have been on edge for most of this year as the Federal Reserve weighed in on the prospect of a rate cut.

Historically, when US interest rates fall, the appeal of the powerful is greater dollars disappears in favor of other currencies.

Yet any hopes for such relief were dashed last week, after forecasts for the first rate cut were pushed back to September, with a decent chance of a further delay until December.

India Inc may not care this time.

“All these hikes in interest rates have actually had no impact on us at all from a business point of view,” said Sumant Sinha, CEO of RefreshIndia's largest clean energy producer and a Nasdaq-listed company, told CNBC's Inside India.

Despite the Reserve Bank of India, along with its global peers, raising interest rates, Indian companies have continued to grow like never before. For example, ReNew reported positive sales momentum in its latest annual results. Remarkably, it also became profitable as a listed company for the first time.

ReNew seems to be entering both the American and Indian markets in a smart way. The $2.3 billion company operates entirely from India, but its largest shareholders are US and Canadian institutions. It is raising US dollar-denominated debt, but is cautious about hedging against any depreciation of the economy rupee.

Being smart has paid off and lenders have taken notice. Societe Generale, the French bank, recently agreed to lend up to $1 billion over the next three years in the current market environment. That's in addition to the billions that more non-bank financial institutions are offering the company, which currently has the capacity to produce about 10 gigawatts of clean energy.

“Over the last 18 months, we have refinanced nearly a billion dollars worth of international bonds through the rupee market,” Sinha said. “We've actually been able to reduce our borrowing costs by almost 60 basis points by doing some of that.”

It's not the only one. Across the country, many businesses and industries continue to grow, as if the increase in interest rates doesn't matter and current levels are normal.

Unlike most developed economies, India's interest rate regime in 2024 is not much different from that of 2018.

This is in stark contrast to the negative interest rates the Eurozone faces, or the challenges Japan faces even today. During the Covid-19 pandemic, interest rates in India were just 4%.

Yet GDP growth in the world's fifth-largest economy has only accelerated since then. Credit rating agency Fitch raised its forecast this week and expects the Indian economy to grow by 7.2% this year.

But what if financial conditions tighten further? Shouldn't corporate borrowers default in a 'higher and longer' scenario?

“We have not seen any instance of bad loans being made,” said Rahul Jain, head of India research at Goldman Sachs.

Shares of ReNew Energy are down 16% this year, despite forecasts of a two-fold increase in earnings per share over the next two years. The shares have sold, along with other stocks in the sector that are facing unique fundamental problems. Meanwhile, the iShares Global Clean Energy ETF is in the doldrums while the S&P500 reaches new heights.

There lies the gap between the economy, the stock market and a single stock.

While companies can grow and even make money when interest rates are high, their stock prices don't always reflect that.

Perhaps there is something to be said about whether Wall Street needs a rate cut more than Main Street.

When asked if he is counting down the days to a retrenchment, Sinha said, “Not just counting down, but waiting very, very eagerly and has been for a long time.”

Must know

India and the US pledge to strengthen trade ties. National Security Advisor Jake Sullivan was in the country this week – the first visit by a senior US official since the election results. After a meeting with Modi, the two sides pledged to strengthen cooperation in defense and technology, among other things.

Four critical areas that Modi cannot ignore with his growth target. Prime Minister Narendra Modi has an ambitious goal of making India a developed economy by 2047, a century after independence from Britain. CNBC's Charmaine Jacob highlights four areas that Modi must focus on if he plans to make this happen.

Decades of high bond inflows. Foreign investors will buy $2 billion of Indian government bonds this month – a 10-year high – when they will be included in the widely adopted JPMorgan index. More than $200 billion in assets are tracking the benchmark, with the allocation to India gradually increasing to 10% over the next ten months.

India records 'longest' heat wave. Delhi is facing a serious water crisis as some parts of India's second-most populous city have risen above 45 degrees Celsius (113 degrees Fahrenheit). CNBC has collected photos taken from across the country as the dry spell is expected to continue for the next four to five days.

What happened in the markets?

Indian stocks are making slow progress but holding on to their gains since the announcement of the general election results. The Handy 50 The index is heading for a gain of 0.4% this week. The index is up 8.45% this year.

Ten-year Indian government bond yields have remained relatively low, with yields falling below 7% and approaching record lows.

This week, Raamdeo Agrawal, chairman of one of India's largest stockbrokers and asset manager Motilal Oswal Financial Services, said on CNBC TV that private investment will pick up as consumer growth picks up over the next six months. He expects that the benefits of rising capital expenditure, which is not dependent on government spending, will become visible in the next two years.

Meanwhile, Rahul Jain, head of India research at Goldman Sachs, told CNBC's Tanvir Gill that the 'Goldilocks' period for Indian banks has ended as they come under pressure. Shares of lenders like HDFC have underperformed the broader market this year as investors focus on credit losses on their balance sheets. Despite the caution, Goldman's Jain prefers Indian private banks over state-owned lenders.