RBI had no option but to keep rates unchanged: Tata Steel

While everybody anticipated a rate cut from the Reserve Bank of India (RBI) in its mid quarter policy review, the central bank went against the market expectation of a 25bps repo rate cut and kept it unchanged. In an interview with CNBC-TV18, Koushik Chatterjee, Group CFO, Tata Steel said that focusing on its inflation targets, the RBI had no other option but to keep rates unchanged. According to him, growth is something which RBI alone cannot bring, the fiscal side too has to be cooperative for enabling the growth momentum.

Chatterjee further added that the banks have become risk averse and this is resulting in pressure on SMEs. Moreover, there has been a slowdown in new projects and significant policy reforms can fuel growth. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos. Q: In the morning when I spoke to you, you were hopeful of a cut. How does this version matters if at all for India Inc.?
A: I also said that the headroom for the Reserve Bank is also limited perhaps, having made one big attempt in reducing the rates the previous time. I think the Reserve Bank is obviously focused on managing its inflation targets. To me, it's a fair target to work around, because the growth is not something which Reserve Bank can do alone. The fiscal side has to help in enabling the growth momentum to come back.
In that context, I think what they have done is perhaps prudent. I certainly agree with what Dr. Rangarajan said. He said, it is a cautious approach, but the levers are not too many to pull at this point of time. It has to come beyond the monetary policy as I think. Q: What is your sense about the Reserve Bank's statement that rupee depreciation has already given a bit of a demand stimulus to India Inc.? It points out that export markets become a little easier for India Inc. More importantly, landed price of imports become a little expensive and therefore, there is price competition or elbowroom for people like you, since the imported competition is that much easier to tackle. Would you say the rupee has been a bit of a stimulus for you?
A: For commodities or products that are dollar denominated and which are dependent on dollar trade flows, certainly the parity price increases. I am not sure about the export front fully, because I think the global markets are not the hottest place to sell at this point of time in many products and services.
I think it is a double-edged sword because if we were to keep putting projects in India, the capital imports also become as expensive. Capital raising becomes also expensive in the sense that you get less rupees for the same kind of dollar. I think it's a double-edged sword but the headroom has certainly increased for products which are based on dollar parity price or import parity price. Q: How disturbing is this for the SME community? You maybe handling a lot of such people, speaking to them, even interacting transacting with them. Does this lack of a rate cut bring the wolf to the door as it were? Was it a tipping point and hopefully, a lower rate would have kept them going? Does the situation worsen or is a pretty much status quo because a lot of SMEs and NBFCs tell us that so long as manufacturing growth is intact we don’t mind paying a little more. They seemed to be worried more about economic activity than about the price of money, but what is your experience in your interactions?
A: It is a bit of a circular reference because the SMEs depend significantly on large corporations and large projects and large revenue share on services and so on. They are certainly driven by liquidity because higher level of credit and cheaper credit helps them in their working capital cycle. It helps them in putting up projects which piggy rides on large projects and so on.
I think the most sensitive element in the organized economy is the SME segment. They would certainly be risk averse in putting up projects even if they were to get assured business from the large corporates because they wouldn’t know what kind of risk profile they can take. I would certainly believe that the distributors, retailers and the large SMEs would be affected if liquidity is not available.
Also what is happening is banks are generally becoming a bit risk averse and they are not supporting, s they were earlier,which puts problem on the small and medium enterprises in carrying out business. The most affected part is actually the SME and the bank credit to them should certainly increase because they are a very important part of the value chain as far as the economy is concerned.
Also read: RBI policy: Bond mkt to lie low for now, says Nilesh Shah Inflation weighed on RBI's monetary policy decision: Pranab July meet right time to look at policy rates: Rangarajan
_PAGEBREAK_ Q: From hereon, how do you expect the investment cycle to move? It has already slowed and with respect to monetary policy there is no additional stimulus which has come through. On the policy side as well, for many months now or years perhaps, we haven't seen anything by way of a policy action. Will things get worse from an investment cycle point of view for India now?
A: If the uncertainty does prolong, then people will certainly become risk averse. People will certainly question the robustness of the structural story that we often talk about for India in the longer term. Therefore, I think it’s imperative to treat this as an inflection point and ensure that we come back in building the pipeline for capital projects and investments.
That’s the definitive kicker for the economy in India as well as employment, which in turn ensures that the consumption cycle continues and so on. I think we have certainly seen slowdown in terms of the pipeline of new capital projects in the country and I think that needs to be addressed.
The policy clarity on several issues relating to large projects in different sectors including sectors like power etc. needs to be resolved. I think we need to get the accelerator back so that we can move into a plus 6.5% growth level. Clearly, depending on monetary policy, it is not going to help us going forward on the growth front. Q: When do you expect the capex to actually pick up for India Inc. and particularly with respect to help from the monetary side, by way of rate cuts, how much does India need to see for capex to pick up?
A: It's very difficult to predict when the capital expenditure cycle will kick off because people will put in money when there are clarity on the ground. They believe that the risks of putting capital is low or is under control and therefore, clarity on several policy issues, reforms on policy fronts are critical.
I think it would be a very hazardous guess to say when it will come back. Once the policy issues are addressed, because there are so many legislations which are in parliament which needs to be cleared up and people will get a sense of comfort and perception drives reality in many cases. When people get confidence in the economy and the future, they would certainly put in real money into the ground. That's very, very critical for the robustness of the Indian economy going forward. Q: There is another policy easing that the Reserve Bank has announced solely for the export sector. What they say is that export credit refinance for banks has been increased from 15% of outstanding export credit eligible to 50% of outstanding export credit eligible for refinance and that will mean around Rs 30,000 crore more available through the banks and that of course will be linked with their export credit limits. Does this make life easier for exporters or is life only easier for banks?
A: I would tend to think for both. If the banks pass on that kind of credit appetite to the exporters, it will certainly help those companies or exporters who have large export basket. Today when you look at where the rupee is, refocusing on exports in a global economy which is really fragile, but it's for those exporters who have large pipeline of orders or who are focusing on exports. I think it would certainly help them. I would only hope that the banks create that credit appetite for the exporters. Q: Now that you are in a fairly turbulent time in the global market, we have seen a lot of commodity price falls. Are you seeing, in the case of steel prices also, the need for Indian makers to adjust their prices lower. Of course you all have got a rupee depreciation benefit, so you may not have to, but do you see your own prices having to be scaled lower? More importantly, do you think your imported inputs, especially for the industry as a whole, coal and especially iron ore is getting cheaper, so would margins improve? How do you see end product prices for you in a month or two and how do you see margins in this quarter?  
A: I think the product prices have always followed the supply-demand balance and it also depends on how one really runs its own business in orientation. For example, just to give a Tata Steel point of view, we have a business model which caters to the retail and the OEM on different strategies and the approaches are very different.
 
You tend to be an FMCG on one side and also look at being a large OE supplier. It all really depends on the value proposition, service quality and product quality. I think the pricing of a product really depends on various factors and not necessarily on one or two issues relating to the market.
 
The question is how do you build premiums over the generic products, for example. It will certainly follow the supply-demand curve. The question for us is always to reduce the amplitude of volatility of prices so that it's good from a customer point of view and it's good from a supplier perspective.
Q: What is the short point, prices don't fall?
 
A: No, I don't think it is a predictive point to say the prices will fall or won't fall. It is the question of how the supply situation yields out for the industry as such and how much premium people can get because of their quality of products. I think relative question is whether it will fall or not fall, because it can fall, it can rise and it depends on how I contract with individual customers and which segment I compete in.
 
As far as raw material prices are concerned, I think if you look at the coal prices, the coal prices have fallen internationally, but that fall has somewhat been offset by the rupee depreciation. So net is still higher. Iron ore prices globally have fallen.
 
I think the question that is happening just now from a longer cycle perspective is some amount of normalization is happening in commodity prices like iron ore, coal, copper and others. That normalization will reflect in end product prices too. It depends on that particular producer being able to offset the normalization through higher premiums on the market.
  Q: The domestic sale of a big company like Tata Steel is dovetail to GDP growth and we are seeing some dismal numbers over there. IIP numbers were also quite terrible. Nevertheless, the rupee depreciation has opened up a bit more in terms of export markets. So for domestic Tata Steel, how is the revenue growth in the current quarter?  
A: The revenue growth in this year '12-13 would be driven somewhat by the new volumes as we progressively bring in the context of the mix and standards that we are working on. It's important to understand that sometimes one has to see as to what can an organization do to overcome the adversity in the environment. Often, there is lot to do internally .
 
We keep going on that journey without a destination that we would keep fighting inflation, we will keep fighting adversity in the environment and see as to how you can build up a portfolio of products and services which holds yourself good across the cycle. That is an important target we keep for ourselves. The revenue growth through volumes will certainly happen, mix improvement will happen and that's how we see the next few months.