RBI likely to tighten rates futher: Nasser Munjee

Q: What is the biggest problem for the environment according to you now? Is it inflation, is it oil or is it interest rates? They are somewhat linked, is it the fiscal situation or is it the external situation which has turned less than benign?

A: There is not just one factor, it is a combination. They are all kicking in at the same time. On the global economy, this has been triggered by the housing sector and with my past experience I watch the housing sector globally very carefully. That is what gave me the trigger because when housing stocks begins to fall in the US economy that is a leading indicator. The subprime was a result of that and everything else that has happened is sort of partly linked somewhere to the housing sector including net wealth of individuals, consumption falling and the real estate markets continuing to tank in the United States. It is a very dangerous situation. You are going to see this trigger even in Europe. London has kept it so far and UK will also be triggered soon. As a result of all of that India is not insulated anymore. We are very much part of the global economy. Because of the reasons that you have mentioned and the combined influence of all of that is going to slow us down.

The silver lining here is infrastructure. We have a tremendous opportunity to spend on infrastructure. We need to invest hugely on infrastructure for the long-term future of the country. In this very bad times, the exactly right thing to do is to have an increased public expenditure on infrastructure and keep the economy moving. If we do this sensibly, we could maintain the growth rate of the Indian economy at least at 6%. 

Q: Getting back to the point you were making about currency because some believe that the RBI’s rate action has come a bit late in terms of stemming this slide in the rupee. Would you agree with that?

A: I would rather like the exchange rate to be market determine and RBI to really concentrate on managing domestic credit. There is a whole problem of duality here because it's very difficult to try and control both those prices. So, the exchange rate should be left more to market forces and the domestic liquidity must be controlled by RBI. Rupee has devalued with respect to dollar because of the current exchange rate movements. The dollar is bound to strengthen soon. So, this prediction that rupee will continue to strengthen may not hold.   

Q: You were making a point about infrastructure, is there a genuine threat that capex might slowdown right now. With the kind of lack of availability of capital that we are seeing for many companies, market conditions and the bad fiscal situation that the government is running. Is it conceivable that we do not get to spend so much on infrastructure either from a public or from a private point of view in the near future?

A: Normally capex is counter-cyclical. We should be investing into capex in the downturn getting ready for the upturn. But, what we do is squeeze cost and wait till the last moment to start triggering the capex expenditure and this exactly what has happened now in India. Firms have suddenly got into capex mode at the height of the cycle and in a sense all of these investments will come on stream when the cycle is on its way down or is low. But, capex investments will continue. Liquidity will be there; a lot of companies now are debt-free so they have a lot of room to borrow and to grow. India is now beyond the short-termism and we are into long-termism. People are going to prepare for the next two-three years. So, I do not see a slowing down in capex very much.

Q: Specific to the banking industry though while the concerns on interest rate rising are taken on board, do you think we might still get away with very robust growth for the banking industry and still stick to that 19%-20% mark or is that in question as well?

A: We have seen very robust growth in the banking sector of the last three-four years. That will probably taper down a little, it is going to be tougher times ahead. The banks have been very aggressive in retail and the retail portfolios are going to suffer. If they have been dependent on wholesale borrowing they are going to suffer. Banks that have been very strong on Current Account/Saving Account (CASA), are going to do fairly well, because they will have much lower cost of funds. Cost of funds for banks is going to be the critical element.

Q: I will ask you to wear your old HDFC hat for a second and tell us how housing finance companies will negotiate this kind of an interest rate and sluggish demand situation. Would you be worried if you were at HDFC now or be confident?

A: I am quite confident. The genuine market for home loans is growing, there are people who are actually genuinely buying houses to live in. The real estate market is going to be upset on the whole issue of investor demand and that’s completely disappeared from the market and developers are going to face that problem. So, real estate is going to suffer, not housing finance. Growth rates may taper down a little because of the rising cost of housing finance. But, there will be a blip rather than any serious problem.