Why are corporate borrowing becoming a concern amid inflation?

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According to the CareEdge report, bank credit has increased by INR 14.1 lakh crore over the past 12 months. The outstanding liquidity surplus has fallen from INR 4.3 lakh crore to INR 3.3 lakh crore in merely two weeks, from June 3 to June 17. Several prominent business houses of India have taken a considerable amount of debt including Tata Group with a total debt of INR 2.89 lakh crore, Reliance Industries with INR 2.66 lakh crore, Aditya Birla Group with INR 2.29 lakh crore, L&T  with INR 1.62 lakh crore, Mahindra Group INR 0.74 lakh crore, and Bajaj Group INR 0.61 lakh crore. Meanwhile, inflation in India has remained above the Reserve Bank of India (RBI)’s tolerance level for five straight months now. In May, retail inflation went up to 7.05%, 75% higher than RBI’s medium-term target of 4%. The surge in inflation had forced the central bank to raise the interest rates twice from 4% to 4.9%. Now, to meet the working capital requirements, Indian companies are heavily borrowing more than before. These borrowings have increased even when the interest rates are moving upward. Working capital borrowings are short-term and already attract higher interest rates than long-term borrowings.

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