RBI may raise interest rates by 50 bps in Q4: Deepak Parekh

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RBI may raise interest rates by 50 bps in Q4: Deepak Parekh

On the sidelines of the Private Equity International India Forum 2009, Deepak Parekh of HDFC, said, the Reserve Bank of India (RBI) would likely raise interest rates by 50 basis points in the fourth quarter. The banking system, according to him, could invest far more but was constrained by RBI limits.

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Deepak Parekh, Chairman of HDFC , on the sidelines of the Private Equity International India Forum 2009, said that the PE deals in India were mostly growth-related as against the leverage buyout model in the West. "Mounting valuations are a big hindrance for PE investors." He is of the opinion that the Indian PE structure has evolved as a consequence of default rather than design. "India has always been a country which is capital scarce but is armed with fiercely entrepreneurial spirit." The Indian family-run business may sell majority stake in the future, he said.

On interest rates, Parekh said the Reserve Bank of India (RBI) would likely raise interest rates by 50 basis points in the fourth quarter. The banking system, according to him, could invest far more but was constrained by RBI limits. He expects huge investment in PE from insurance companies.

Here is a verbatim transcript of Deepak Parekh's comments on CNBC-TV18. Also watch the accompanying video.

On PE in India

There is a strong dominance of family owned and controlled businesses, many of which have been passed down through generations. Giving up control of family business and family owned entities even if it is for a financial gain, does not culturally fit in to the Indian psyche. Indian promoters tend to be emotionally attached to their companies and this perhaps explains their reluctance to let go of their companies. This is in contrast with many Western entrepreneurs who set up ventures with the sole objective of selling them off and using the proceeds to start a new venture.

There are however many Indian companies that need strategic partners who besides providing capital can work in tandem to ramp up growth, open new markets, build alliances and even help to attract talented professionals. Bearing in mind the cultural and social fit, PE firms in India generally tend to opt from minority stakes in companies by providing growth capital. PE investors are betting on India's growth story, growth potential while Indian companies in turn recognize that PE companies and PE firms bring much more to the table than just cash.

On IPO valuations in India and China

Initial public offerings (IPOs) are seeing a revival and this may provide attractive exit strategies for some of you. However, many of the recent IPOs have been overpriced. I was looking at the paper in China, the last recent five IPOs are all under water. Promoters wanting to cash out on a rising market scenario is fine but not at the cost of leaving nothing on the table for the investors. In today's environment investors have reason to be fickle and unforgiving. The going has been good for India so far but markets are looking a bit expensive at over 18 times forward earnings now especially in comparison with other emerging countries. So there is reason to be cautious. While many maintain that India's growth can sustain such valuations, I believe that if markets cool off a bit, it would help earnings to catch up with valuations which would benefit the market in the long run.

On interest rates

We have ample liquidity. I think yesterday banks had over Rs 1,50,000 crore in reverse repo. So with such excess liquidity, where is the question of increasing interest rates. The only fly in the ointment is that inflation is inching up particularly on food and the consumer price index (CPI) hasn't come down, it is going up. So there is a remote chance that a marginal increase in interest rates may happen but I don't think it will happen in this calendar year, maybe in Q1 of next year. But again it is a token, it is a marginal, just to give the signal that the government is concerned, the Central Bank is concerned about inflationary pressures.