While lower interest rates are good for consumers and companies that have borrowed heavily, those sitting on a large cash pile will be an unhappy lot.
Companies that invest their surplus cash in debt instruments such as fixed deposits and non-convertible debentures may see their interest income fall with a cut in interest rates. The RBI has effected only a 50 basis point cut in policy rates, but the yield on the benchmark 10-year Government bond has declined by over 80 basis points in the last six months. Likewise, the yield on the 10-year AAA rated corporate bond has fallen by almost 100 basis points during this period.
So, which are the cash-rich companies that will see their investment income shrink, with a fall in interest rates? Indian subsidiaries of multinationals that have significant cash reserves and do not have any major capex plans may see a marked decline in their interest income. For instance, drug maker Novartis India earned interest income of ₹81 crore in 2013-14, which constituted over three-fourths of the company’s pre-tax profit.
A further fall in interest rates may lower the interest income earned by the company.
Similarly, interest income accounted for over half of engineering major Ingersoll-Rand India’s pre-tax profit in 2013-14.
Similar to MNCs, PSUs such as Coal India, MMTC and NBCC, which have significant cash reserves and earn a sizeable portion of their profits by merely investing the cash surplus, may have to bear the brunt of falling interest rates. Take MMTC, for instance; interest income accounted for over three-fourths of its pre-tax profit.
Likewise, for Coal India which held massive cash reserves in excess of ₹52,000 crore as of March 2014, interest income accounted for almost a fourth of its operating profit in 2013-14.
Given the huge cash in its books, the company’s interest income can moderate with a reduction in interest rates by banks.