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India Corporates have more headroom to borrow
December 20, 2021
Indian corporates have a lot of headroom to raise resources through debt to help stimulate investments and growth. It is estimated that corporate leverage drags growth beyond debt equity ratio levels of 60% and debt to assets ratio of 28%. But current reading for India is at 48 & 19 percent respectively, gives them big space for debt borrowing says a research paper by RBI economists.
An analysis of Indian corporate data over a 39-year period till present, found that financial variables are assuming a greater role in determining the investment dynamics of the Indian corporate sector along with business expectations and policy unpredictability.
The decline in investments post the worldwide financial crisis cannot be solely attributed to weak economic conditions. Leverage has a greater role in determining the investment pattern of the corporates with there being a negative relation between the two.
“In the Indian context, leverage measured as debt-to-equity ratio 60% as the threshold level beyond which debt is found to be negatively affecting investment says the research paper titled “Reassessing Investment Dynamics – Newer insights into leverage and investment of the Indian corporate sector one of RBI’s working paper series authored by Deba Prasad Rath and Sujeesh Kumar, the views are not that of the central bank”.
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