RBI Policy: How will it impact auto biz, banks?

Diwakar Gupta - Former MD, CFO, SBI.

In a shocker to industry and banks, the RBI left rates unchanged in its credit policy. In an interview to CNBC-TV18, SBI managing director Diwakar Gupta and Pawan Goenka, president - automotive, Mahindra & Mahindra explain the various aspects of the impact on industry and banks.

SBI's Diwakar Gupta explains his support to the RBI's move to leave the rates unchanged on the limited power of rate cuts to infuse liquidity, control inflation and boost the economy.

In complete contrast Pawan Goenka, president - automotive, Mahindra & Mahindra vociferously condemns the RBI's move and says that reduced liquidity in the economy would not only affect the auto industry, but all ancillary industries dependant on the auto industry.

Where both experts agree is on the government's inaction to initiate reforms.

Below is an edited transcript of the discussion on CNBC-TV18. Also watch the accompanying video

Q: The industry was clearly not hopeful of expecting a repo as well as a CRR cut. That was a representation made by the Confederation of Indian Industry to the government as well. Are you disappointed and are some of your peers are angry as well?

Goenka: I cannot say if they are angry. But yes, they are surely disappointed with the way things have been going in the last few weeks about the economy, overall market and consumer sentiment. There were expectations that something would happen in the RBI's policy to the rates and more liquidity would be infused into the system.

It is also more disappointing to note that no initiative has been taken in controlling and reducing inflation. The RBI governor must be feeling a bit helpless.

Q: The SBI said that a 1% CRR cut was the need of the hour. The RBI has clearly delivered a status quo policy at this point of time and there is a question mark on how much or whether it will act on July 3? Do you understand the central bank’s predicament at this point?

Gupta: The central bank had been very clear in April that it had done whatever was possible, given the circumstances. The RBI would happily consider doing more if the fundamentals of the economy warranted and a turnaround was seen.

Unfortunately, the global scenario as well as the domestic scenario has not improved in last two months. So, at a professional level, the RBI's action is quite consistent.

Q: We are all aware of the global situation as well as the domestic compulsions, but that didn’t stopped bankers from proposing a 1% cut in CRR?

Gupta: From the banker's point of view, I see what is good for the industry and banks. High interest rates leads to more NPAs which in turn hurts banks and tight liquidity. It was more of a wish-list for any banker as any cut in CRR directly infuse more liquidity and adds to bottom line. There is no disappointment or surprise in what the RBI has done today. A CRR cut immediately gets that money to earn for us. We have deliberated around Rs 1,200 crore in past CRR cuts.

Q: How difficult is the liquidity position at this point in time and do you take heart from the fact that the RBI has clearly said that management of liquidity remains a priority. It will use appropriate instruments like the OMO window?

Gupta: There is a Rs 80,000 crore liquidity deficit in the system. Fortunately, as of now SBI does not have a liquidity issue, but credit demand itself sluggish. I don't know whether liquidity is really very tight. It's a question of some hot money going around at high rates by way of CDs and CPs in the system, otherwise liquidity is manageable.


Q: How difficult is the position as far inventory levels are concerned? From my understanding, in May, inventory levels for the auto sector have almost doubled. Infact, I understand that they have doubled. What is the situation, as far as inventory is concerned, if indeed the Reserve Bank were not to act on July 31 because the industry in general has been pegging an uptake in demand to the interest rate cycle?

Goenka: First of all, as far as the inventory is concerned, my take is that all automakers would adjust their products and shut down plans, if they have to adjust inventory because inventory sitting idle is not helping anybody.

So, I would think the high inventory that we have seen in the month of April and May is because of original plans that they had of higher sales and sales didn’t happen. Therefore, you would probably see a lesser production in June and therefore inventory would come down.

When the vehicles are on sale, there will clearly be moves that automakers would make in terms of trying to give incentives to sell their vehicles. That then doesn’t help in terms of profitability of the industry, which is not very high. So, we are kind of in this vicious cycle that we have fallen into and how do we come out of it because you have to have a healthy industry.

It will not just affect auto industry, but also other ancillary industries. Therefore, we have to come out of it somehow. I don’t know what the prescription will be, but certainly prescription is not to increase taxes on any kind of automobiles at this point of time.

Q: Post the RBI’s status quo policy, we also heard another disappointing piece of information and that was Fitch. It has downgraded the Indian ratings outlook, at this point, to negative following the foot steps of S&P. But at the same time, it is saying that we give the government 12-24 months to act on things like fiscal consolidation. How much of that is going to impact sentiment?

Gupta: Anything negative impacts sentiment. There is no doubt about it. So, we cannot wish away the fact that Fitch has downgraded India’s outlook to negative. At the same time, the fact is that there is more than an adequate time window available. So, as far as investments are concerned, technically the rating does not change.

As far as the mood of foreign investors is concerned, there is a significant amount of scepticism, if not negativity already. So, if you look at it as a positive, it is a wake up call to say we need to do something and the window is available for us. Why shouldn’t Fitch upgrade or revise the rating once again six months down the line, if the fundamentals do show a significant improvement?

Q: The RBI has thrown the ball back in the government's court, forcing it take decisions to spur investment and growth. If the reforms are not initiated at the Centre with the TMC threatening to pull out from the UPA, do you believe there is elbow room for the RBI to act on July 31?

Gupta: The RBI has clearly stated that monetary policy has a limited role to play in the current economic scenario, especially in the case of food inflation. Inflation needs to be tackled through creation of capacity in agriculture- inputs. irrigation, productivity, and storage.

To spur domestic investment, the government has to implement value-creating subsidies and boost the investment sentiment to lure foreign investors.

Q: What do you expect the RBI to do on July 31?

Gupta: I think the Reserve Bank has said two very things very clearly- the central bank is open to reassessing the situation as quickly as warranted and if there is an aggravation because of a global economic catastrophe, then the bank will they will intervene. So both those assurances are consistent with the fact that if there is not much hope of remedying the situation through rate-cuts.

Q: What is the outlook now in terms of credit growth?

Gupta: That's a hard question because the outlook on what the GDP growth will be is itself a little difficult to estimate.

Q: What’s your own sense?

Gupta: In the current scenario, we are looking at a credit growth of 14-15%.

Q: You prescribed to the government that they should hike diesel prices by Rs 1-2 and bring down petrol prices by Rs 6, not to hike excise duty on diesel cars, but when we are talking about fiscal consolidation you are telling the government to take on the burden of under recoveries even on petrol, which is deregulated. How does that solve the problem?

Goenka: No, the petrol and diesel consumption ratio is 4:1. You can be revenue neutral if you increase diesel prices by Rs 2 you reduce petrol prices by Rs 5-6.

The gap between diesel and petrol fuel prices will come down and the negative sentiment for petrol vehicles will reduce and sales may pick up. Petrol-vehicles' sale will not pick up even if diesel vehicles are taxed. Petrol vehicles will pick up if you reduce the prices of petrol and that you cannot do unless you increase the prices of diesel.