Rate cut to benefit consumers & manufacturers: Sunil Munjal

He further adds that the RBI’s concern about growth comes as a relief for industry which is buckling under the pressure of high costs and lethargic economic growth.

The central bank today surprised the street by cutting repo rates by 50 basis points, but dashed hopes of further easing in the year. Despite this, Munnjal says the rate cut is a good sign for the industry.

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.

Q: Is 50 basis point sufficient to spur any kind of investment and growth in the sector according to you?

A: I think 50 bps is a very good signal today because as you know the expectation in the market was that the cut should be at least 25 bps, if not more. So he has signaled clearly that that is a direction we are going in now. They will ease not just the cost of money but hopefully in the next stage also availability of liquidity because both have become a constraint for business in India.

Q: Is this quarter percentage point fall in lending rates which bankers are talking about enough to spur buying in the two-wheeler market because that is the segment where we saw a perceptible slowdown?

A: If your question is does this make Indian industry as competitive with the rest of the world as it needs to be, the answer is this is not enough. But I guess we also have to look at our own situation because the tool used by RBI to fight inflation over the last couple of years has been increase in bank rates.

Now that inflation is getting moderated and that growth has suffered over the last few months, this is both the message and a tool they are making available. The message is that they are concerned about growth and that they are somewhat more comfortable now that inflation will get managed, so it naturally starts to reflect on business.

If this strength can continue, I would imagine companies would do better both in terms of being able to invest and being able to run their businesses more successfully.

Q: With respect to domestic demand, is the first half of FY13 looking a little better than the second half of FY12?

A: The questions I was being asked earlier was not about our company, it was about industry in general, which is what I am responding to. This will make a difference to both consumers and manufacturers; consumers to borrow at lower cost and manufacturers to be able to manufacture at more efficient cost.

To answer your question is this enough in the long-term, of course it is not. We are still one of the most expensive cost of money in the world, but is it a good signal.

Q: What is the projection for how the margins in the industry might play out, because the RBI has said that passing on increases to consumers has been difficult?
 
A: There is certainly pressure right now from the market. The only saving grace right now is that commodity prices or raw material prices have started to ease off globally as also in India. That will provide a cushion to the industry to be able to service the consumers well and yet be able to maintain margins, but clearly there is pressure right now in India.

Q: What is the projection then of how the auto industry, whether it is the four-wheelers or two-wheelers, grow in FY13?

A: I don’t want to throw out a number at this moment, but there are number of projections floating around as you are well aware. People have talked of growth still being in double digits; being from low double digits to mid-double digits and some of them have even said some sectors may achieve high double digits.

But I think this is relative to the rest of the world. We will still see a better growth but clearly not what the full potential of this country is until the overall system in the economy starts to improve.

Q: Do you see prices getting passed on further since you say that demand will get a little more robust?

A: As you saw, across the board prices increased when the excise and service tax went up because that is something which companies do not have the capacity to absorb. Some companies will be able to pass it on, but as I said the good thing that is happening right now is moderation in raw material prices.

They may not necessarily all need to increase prices to be able to maintain their bottomlines or in some cases even improve their bottomlines. So it is going to be mixed bag I think and we will see what happens within the next few weeks.

Q: SIAM had said that two-wheeler sales growth in FY13 is seen at 11% to 13%. Is this possible or could we expect it to go higher after the rate cut?

A: Anytime liquidity becomes available easier or the cost of funding goes down, clearly it helps the consumers to acquire more such products and that should be a help.

As I said, the industry expectation is that the RBI would not just stop at this one reduction  and will help the consumers to be able to acquire these products but these are not luxury products, these are essential products, which people need to go from place A to place B.