be interest rate impact on manufacturing company

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INTEREST RATE Interest rates can be defined from different perspectives, for an Individual an interest rate is the price a borrower pays for the use of money, they do not own. For an Organization, Interest is a fee paid on borrowed funds/assets. It is the price paid for the use of borrowed money or, money earned by deposited funds. For General Banking, An interest rate is the amount received in relation to an amount loaned. An interest rate is the amount received in relation to an amount loaned, generally expressed as a ratio of rupees received per hundred rupees lent. Interest rates are normally expressed as a percentage rate over the period of one year such as 8% per annum, 10% per annum etc.


BANK RATE Bank rate is the rate at which the central bank (RESERVE BANK OF INDIA in INDIA) lends to commercial banks and acts an important benchmark in determination of interest rates charged by banks from the ultimate borrowers. In brief, by raising bank rate, central bank raises the cost of borrowing. This forces the commercial banks to raise in turn the rate of interest from the public and vice versa The present bank rate is 6.0%


REPO RATE Whenever the banks have any shortage of funds they can borrow it either from Reserve Bank of India (RBI) or from other banks. The repo rate is the rate at which the banks borrow these excess funds. The borrowing bank mortgages its government securities to carry out this loan transaction. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. The present repo rate is 6.00%


REVERSE REPO RATE Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from the various commercial banks. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to attractive interest rates. It can cause the money to be drawn out of the banking system. The present reverse repo rate is 5.00%

Cash Reserve Ratio:

Cash Reserve Ratio CRR is a measure to ensure safety and liquidity of bank deposits, however it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflation, the RBI has the option of increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money supply and inflation. Cash Reserve Ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The reserve ratio is sometimes used as a tool in monetary policy, influencing the country’s economy, borrowing, and interest rates. The present CRR is 6.0%

Sectors Affected :

Sectors Affected Change interest rates have a major impact on two sectors : Automobile: Increase or decrease in interest rate will directly affect the automobile industry because a majority of people are depending on car loans or two wheeler loans for buying vehicle. So if the interest rates are increasing, people won’t be able to afford this and normally the demand for automobiles will come down this will have a very bad impact on the industry. Real Estate: Real estate industry is closely related to the interest rates. A small change in the interest rate can influence the performance of the industry. If there is an increase in interest rate the demand for real estate will come down because a large portion of real estate investors are taking the support of bank loans for investment. Normally if the interest rate goes up they won’t be able to take a loan and invest. This will lead to the negative growth of the industry. If the interest rate in decreasing, it will help to boost the industry’s performance.

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Interest rate Borrowers Customers Company Sales Investors Production Strategy Profit Import Reducing cost Suppliers Economy Growth Stock Market Foreign Exchange


TATA MOTORS Tata Motors is India’s largest automobile company It is the leader in commercial vehicles and among the top three in passenger vehicles. The company is the world's fourth largest truck manufacturer, the world's second largest bus manufacturer. Tata Motors has auto manufacturing and assembly plants in Jamshedpur , Pantnagar , Lucknow , Ahmedabad , Sanand and Pune in India, as well as in Argentina, South Africa and Thailand. Products : Passenger cars and utility vehicles Concept vehicles Commercial vehicles Military vehicles

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( Rs . in crores ) Company 2009-10 2008-09 2007-08 A FINANCIAL RESULT ( i ) Gross Revenue 38,364.10 28,568.21 33093.93 (ii) Net Revenue (excluding excise duty) 35,593.05 25,629.73 28739.41 (iii) Total Expenditure 31,414.77 23,877.29 25807.82 (iv) Operating Profit 4,178.28 1,752.44 2931.59 (v) Other Income 1,853.45 925.97 483.18 (vi) Profit before Interest, Depreciation, 6,031.73 2,678.41 3414.77 Amortization, Exceptional Items & Tax (vii) Interest and Discounting Charges (Net) 1,103.84 673.68 282.37 (viii) Cash Profit 4,927.89 2,004.73 4057.84

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Rising interest rates had a negative impact on company because when interest rates was raised, the cost of borrowing money rosed. Ultimately, the company profitability and ability to grow was reduced. When a company profits (or earnings) dropped, its stock became less desirable, and its stock price falled . A company success comes when it sells its products . But increased interest rates negatively impact its customers. The financial health of its customers directly affected the company ability to grow sales and earnings. When interest rates rise, investors start to rethink their investment strategies i.e Investors sell shares in interest-sensitive stocks that they hold. Interest-sensitive industries include electric utilities, real estate, and the financial sector. Interest rates rises –sales effects - profitability is affected - dividend payments too effected. The price of a stock depends on the earnings of the company. If the earnings slow down (because of higher interest rate payments), the prices of the stocks will dip and overall, the stock market will be hit. A rise in interest rates also cools down the economy . demand for goods and services rise. If the supply is not immediately forthcoming, the price of those goods and services rise. That leads to inflation.

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Low interest rates are good for business, it makes it cheaper to borrow funds, invest in new projects, expand supply, etc. Low interest rates also increases consumption as debt finance becomes cheaper and people’s disposable income rises as existing interest payments are reduced. A decrease in interest rates therefore increases revenue expectations for most businesses. car sales down as compared to the previous year. reducing costs wherever possible, consolidating brands and dropping model lines and deferring R&D projects to conserve funds.


CONCLUSION RBI has taken multiple actions in order to ensure that the economy does not suffer a massive downturn. Lowering of the interest rates would first impact the deposit rates offered by banks as they bring down their cost of funds and then pass on the benefits to the borrowers by lowering lending rates. The impact of lower deposit rates will make fixed income instruments less attractive in the short to medium term.

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