Business News | RBI Rate Hike May Pressure Power Sector Earnings, but Regulated Returns Offer Protection: Jefferies

New Delhi [India], October 7 (ANI): India's power sector could remain resilient despite a higher interest-rate environment, with strong electricity demand and the possibility of renewed power shortages providing support to sector earnings, according to a research report by Jefferies.

The brokerage said the Reserve Bank of India's 25-basis-point rate hike to 5.5 per cent was expected, but its shift to a calibrated tightening stance has raised expectations of 75-100 basis points of further rate hikes, compared with 50 bps previously. The higher-rate environment could increase financing costs across the power sector, although the impact would vary depending on companies' debt structures and the extent to which interest costs can be passed through. 

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Jefferies noted that the sector has some protection against higher rates because a significant portion of utility borrowing is at fixed rates and a large share of the industry's regulated asset base allows interest costs to be passed through. This could limit the transmission of higher borrowing costs into earnings, particularly for regulated businesses. 

At the same time, the brokerage expects strong power demand to remain a key earnings driver. Electricity demand has increased 10 per cent year-on-year so far this year, while power generation rose 13 per cent YoY in September, according to the report.

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Jefferies expects power shortages could re-emerge over the next four to five months, which could support merchant power prices. Reports suggesting that El Niño conditions could continue into 2027 also point to the possibility of a repeat of the peak power deficit seen in 2026.

The potential tightening in the supply-demand balance could provide an important offset to higher financing costs. Jefferies said higher merchant power prices would particularly help companies with exposure to merchant markets, while higher tariffs could also improve profitability in power trading businesses. 

The brokerage therefore remains constructive on the power sector despite the recent correction in power stocks. It said the decline in sector stocks over the past five to six months represented a stock-specific buying opportunity, while the broader fundamentals remained supported by robust demand and the potential return of supply shortages.

Jefferies' assessment suggests that the impact of monetary tightening on the power sector will depend not only on borrowing costs but also on the evolving demand-supply balance, merchant tariffs and the ability of regulated utilities to pass through higher interest expenses. (ANI)

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