YM Deosthalee, chairman and managing director of L&T Finance Holdings says CRR cut was the right step. "RBI will not be able to kick start the economy."
The Reserve Bank of India left its key policy rate unchanged in its second quarter (July-September) monetary policy. However, it cut cash reserve ratio (CRR) by 25 basis points to 4.25%.
In an interview to CNBC-TV18, YM Deosthalee, chairman and managing director of L&T Finance Holdings says CRR cut was the right step. "RBI will not be able to kick start the economy. I think the interest rate environment is, to a considerable extent, sentimental. It is important, but it is not necessarily the only thing that can ignite the economy. So, under the circumstances, it was probably too much to expect rate cut because the inflation continues to be very high," he elaborates.
Credit Policy: Non-committal to rate easing; dampens mood
Below is the edited transcript of his interview on CNBC-TV18.
Q: We have just had the Reserve Bank of India credit policy, the CRR cut was 25 bps, which was slightly below what people had hoped for. There was no cut in repo rates. How important is a cut in CRR rate?
A: Reserve Bank of India’s policy is enabling kind of policy. So, they will not be able to kick start the economy. I think the interest rate environment is, to a considerable extent, sentimental. It is important, but it is not necessarily the only thing that can ignite the economy. So, under the circumstances, it was probably too much to expect rate cut because the inflation continues to be very high. Reserve Bank of India is concerned about the inflationary pressures both domestic inflation as well as imported inflation. Therefore, till inflation comes under some control, they are not likely to do anything.
I think that the liquidity conditions remain comfortable in the system. That is important. We have witnessed, in the last few days, very tight liquidity in the market. Under that liquidity adjustment facility, about Rs 100,000 crore was being borrowed. So, I think CRR cut was the right step. One thought that it could have been a little higher than 25 bps because 25 bps releases about Rs 17,000 crore into the system, given the current situation.
I think the liquidity tightness is likely to continue, given the festive season, Diwali is approaching. Also, the government borrowing programme is continuing. I think, till November end, it’s likely to go on. The liquidity situation is going to be a bit tight. So, under the circumstances, one thought, 50 bps would have been better than what has been done.
Q: But I think that the liquidity situation is tight largely because of the government because the capex cycle still hasn’t caught out.
A: I don’t think that there is any improvement in the capex cycle. Both industrial capital expenditure and infrastructure spending continue to be at a subdued level. Even consumption spending has not been particularly high. Infact it has come down. But given the next few day, when we will be seeing festival activities in the country, hopefully, it might pick up. But current problem is mainly because of the government borrowing programme.
Q: Earlier in the week we had the finance minister say that he was hoping to rein in the fiscal deficit at 5.3 percent, which is admissioned that he will overshoot target of 5.1 percent, but the consensus is 5.7-5.8 percent. Do you think he can bring it down to 5.3 percent? If he does, do you think the liquidity situation will ease considerably?
A: As far as government is concerned today, the most important weapon, which government has in hand, is disinvestment. I think they are banking on divestments. I think there are number of companies where they can come down in terms of their overall holding. If the market continues to remain stable, it will enable government to go ahead with this divestment programme. I think that should help them.
However, given the fact that there is only a marginal increase in the fuel prices and the demand for fuel is going up, the deficit is not going to be a comfortable situation at all. I think it is going to be challenging to maintain at 5.3 percent level, even if they consider very aggressive disinvestment programme. So, I think some more steps are required. Hopefully, they will announced a few more things.
Q: Is life today looking much brighter than it was six months ago? Atleast today there is a feeling that the government is concerned that there is a problem in the economy. So, are you today a slightly happier man than you were six months ago?
A: Yes, ofcourse. There is no doubt at all. It is not a question of being happy. I think there is definitely an urgency. You can feel the urgency. If you meet anybody in the bureaucracy as well as in the government I think there is an eagerness to do lot of things. They also understand the seriousness. While there have been some good steps, which have been announced, I think much more needs to be done. I think there is definitely a realisation on the part of the government and everybody that I think things should move at a much faster pace.
Q: We have seen stock market react positively, we have seen the rupee also react positively. But on the ground, what are you seeing? Are you seeing any green shoots, are you seeing any signs that look hopeful?
A: As far as our business is concerned, it is actually retail lending, wholesale lending and there also various pockets. So, let’s first look at retail lending. In retail lending, we do financing for tractors, cars. Recently, we have acquired an entity for two-wheeler financing. We also do traditional construction equipment financing as well as other financing for equipments like small commercial vehicles required by the rural and semi urban market. As far as some of those areas are concerned, the activity level continues to be good.
Q: You mean the construction equipments in the rural areas?
A: No, I don’t mean the construction equipments. Construction equipments have been very badly affected. I am talking about tractors, harvesters, small commercial vehicles and to some extent, cars. Our portfolio in cars is very small and it is not a problem to grow on a small base, because it is just the beginning. We started that business, a couple of years ago. So, despite the fact that the industry may not grow at a healthy rate, we can still continue to grow, because our base is small. But there is definitely some perceptible slowdown in that space.
Q: The result of pure consumer companies was much better in the last and current quarter than the other economy. How do you explain the dichotomy? Is it largely rural driven? How is one pocket, which is a fairly significant pocket, able to sustain in the phase of an otherwise sluggish economy?
A: Consumer financing is totally different than what we are talking about. Even tractors are not part of it, in that sense. Consumer financing typically includes two-wheeler financing or consumer durables’ financing. So that market, continues to do well. The only reason why that consumption financing is still holding alright, is because there is not much of a slowdown in that pocket.
There are two reasons for that. One ofcourse, is the government spending to some extent. But, I think the services industry continues to do well. I think the income levels are at decent levels.
Q: We haven’t seen large scale retrenchment in services companies. Any danger that, that could happen if the global economy slows down further?
A: Even if global economy slows down our belief is that outsourcing business should continue to do well. There will be tremendous pressure for them to reduce cost and more and more off-shoring could take place. We have, as an entity, consciously chosen to be diversified. The reason for that is, diversification in financial services helps in de-risking your portfolio. If you are focused on one sector and if there is any problem in that particular sector, your growth comes to a standstill.
Considering we have decided to be diversified, it doesn’t mean that we will be in all the areas. Initially, we started with income generating assets, now we started with assets which have emotional value as far as the customer is concerned.
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