Broad-based boost key; India still hot investment hub: Gill

Meet Ravneet Gill, CEO, Deutsche Bank India in this edition of The Forbes India Show on CNBC-TV18. As member of the Asia Pacific board at Deutsche Bank and former head of capital markets and treasury solutions at Deutsche Bank India, Gill calls for a more broad-based framework to boost economic growth than just issue bonds to lure overseas investment.

Gill also adds that India continues to be a lucrative destination for investment and explains that most of the problems stem from supply-side constraints that could be resolved with adequate investment.

Below is the edited transcript of the show on CNBC-TV18

Q: With all the measures that regulators around the world are taking, how difficult is it to be a banker today?

A: I would say the times are exciting rather than difficult. When you work for a global organisation there are three factors  that determine how much can be done and how quickly it can be done. One, is the size of the domestic market and the market opportunity. Second. Two, is the institutional commitment to that market and three, the quality of talent that you have with you.

I think on the second and third categories we have been so overweight that it has in some ways made up for the shrinkage in the local market opportunity. So I would say that in some ways we have had to rework our strategies and restack some of our strategic initiatives.

Q: As head of capital markets, do banking shares look attractive around the world?

A: Regulations are getting tougher everywhere. So I do not think that is an India-specific phenomena and I would not put too much weight on that. On the other hand, Indian banking stocks are very, very undervalued compared to China. And I think that stems from the lack of adequate global recognition of the quality of India's financial services system.

Q: There have been a spate of measures from the Reserve Bank of India (RBI) with the intent to protect rupee at almost whatever cost. Do you think it will succeed in doing that? Do you think the central bank will be able to keep the rupee at around 60?

A: There are two aspects to this. One, is of course the central bank’s measures that were announced in three installments. Will these measures be able to stabilise the rupee? I think in the medium-term, the rupee will stabilise. Two, if you notice, the central bank has not touched the cash reserve ratio (CRR) or the repo rate to signal that these measures were intended to remain short-term.

Q: Will the market attack rupee after the RBI’s measures are withdrawn? If the government seems to be even slightly dovish on interest rates, the signals are that it is not serious about the moves it is making. So will that have its own effect on the rupee because it is so sentiment driven?

A: There are a few factors. One, the government thought that if yields went up then FIIs would again come in and invest in debt, but the problem is that the forward premiums have moved up so much, so to some extent that gets negated.

Historically, the impact that interest rates have had on development in India has always been with a lag. And it is only when a very high interest rate regime has subsisted, that there has been an impact on growth.

Currently, I think the government is looking at the concern that rupee at Rs 64-65 will raise in investors as well as domestic companies, a majority of which have large foreign currency exposure. So stability is the key now and that is what the RBI will go for at this point in time.

Q: How quickly do you think the rupee can stabilise?

A: I think you need to take into account a few internal and external factors. India’s current account deficit (CAD) is largest among the emerging markets (EMs) players. So that clearly is a note of caution.

Q: So did the government have to show intent there?

A: I think the intent has been shown. However, it just needs to show a little more progress. If you look at India's total foreign currency borrowings, about USD 173 billion matures over the next 12 months. That is a big amount and foreign investors will be keenly keeping a watch. The world needs to believe India can solve its debt problems

Q: How can that be solved — by way of issuing bonds?

A: The issuing of bonds should be part of a slightly broader solution to address the problems that may arise from the commodity cycle coming off and slowing down of growth in China. India should also focus on exports with the US economy starting to recover. So there is a very good case for more money coming into India. India should also go and woo the strategic long-only investors like sovereign wealth funds a little more rather than just relying on FIIs.

Q: Do you think bonds could stabilise the fall in the rupee or is there danger of going into a spiral of debt?

A: I don’t think so. I think it makes sense to issue sovereign bonds because apart from bolstering reserves it creates a runway for other corporates as it creates a benchmark for other corporates to go out there and borrow. I think it will make overseas borrowings for Indian corporates a lot more efficient. Not only will it bolster foreign currency reserves, I think it will signal intent and people want to see decisive action on the part of the government. It will create a very good benchmark for other Indian corporates to go out and raise money.

Q: There will be an appetite for Indian bonds?

A: Absolutely. I think there will be lot of appetite for Indian government bonds.

Q: What do you think should be the government’s approach while issuing bonds? How should it minimise the impact on forex volatility?

A: The factors that have lead to the volatility in forex were not of India’s making. It started with the Fed’s announcement with regards to the tapering of the quantitative easing (QE) and to that extent, the situation has to be viewed in a balanced perspective. It is not as if the investors redeemed their investments purely on account of any fundamental concerns on India. The current account deficit and the fiscal deficit look a lot better today than they did 12 months ago.

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Another issue which was much more systemic in terms of draining out of liquidity, was the probable tapering of the QE. Though that has more global implications, the issuing og bonds is only a part of the solution to address it. India will just need to compete harder for flows going forward especially as the US is recovering. India will need to intensify its engagement with global investors and broaden its appeal.

Q: Do you think India will succeed in luring investment because Posco, Arcelor Mittal and Warren Buffett exited out of respective ventures?

A: The common problem that overseas investors face with India is supply side constraints. But supply side constraints can be easily sorted out with adequate investment. Fortunately, demand hasn’t disappeared. Investors need to recognize that India is a very sentiment-driven economy and currently the sentiment is very conducive to spending or investment.

Q: What are the measures that are needed to boost investment?

A: I personally believe that the government has, by and large, done what it could. Incrementally, the government also needs to build a broad national consensus.

Q: What is your view on the possible RBI initiatives on bank subsidiarisation? Would you be happy being a subsidiary?

A: We are keeping all our options open and would like to see what the final guidelines mean for us. Do bear in mind that subsidiarisation is not a phenomenon which is unique to India. It is being discussed in a lot of other countries, chiefly the US. As a global institutional, we have to look at all the implications on capital and other obligations on the ground. We are waiting for those guidelines. If we do subsidiaries, it needs to be balanced with how capital is treated.

Q: You have 17 branches today. If you had 20 branches, you will come under more stringent priority sector lending norms. You can no longer pass off lending to exporters as priority sector. Does that worry you?

A: I think it is a concern for all banks and foreign and nationalised. Though we are all for inclusivity and definitely believe that we need to shoulder some of that burden, that does that mean that we will build the last mile ourselves. However we are willing to contribute to building that last mile with somebody who has more expertise.

Q: One of the worries that foreign banks have expressed is that even if they were able to open more branches, they maybe allowed only in tier-II and tier-III cities. Will that be an attractive option for banks like you?

A: We would like to have a level playing field. Though we are all for entering into tier-II, tier-III cities, but we would not like to be confined.

Q: You spoke about how banks would need to re-strategise their businesses. How have you re-strategised? Is retail still a large focus or do you think that is better left to banks with a larger footprint?

A: Today the focus on retail is bigger than it was when we started off. Our exit from the credit card business has a very good reason and was not due to any loss of resolve as far as our retail banking aspirations are concerned. Clearly, our retail banking footprint will be built around the business of banking as well as mortgages and on those two segments we feel very comfortable doing our balance sheet. So we have very major aspirations with regards to retail. One of the things which seems attractive about the wholly-owned subsidiary of course is the ability to proliferate rather than setting up one or two branches every year.

Q: How is the business doing now? What are delinquency rates today? Are you worried or do you think it is par for the course?

A: For the year ended March 2013, when India's macro-situation never looked tougher or more challenging, we were able to grow 25 percent. It did not dilute our return on equity (RoE). The quality of our portfolio remains absolutely pristine. However, the strategy has changed from structure to flow and focus on client selection. But despite there being no new investment or a new capex last year, we financed more deals than before.

Q: How did that happen?

A: I think we came up with a lot of creative solutions.

Q: What is the Deutsche Bank's view on the Indian markets?

A: As far as India is concerned, even though the macro-economic factors have been fairly challenging, we continue to significantly increase capital and strengthen the balance-sheet.

Q: Today, India is Deutsche's fifth largest country of operations. Will it continue to remain so ?

A: Yes, it is also the fifth most profitable area of operations.

Q: So will the interest continue to be as focused on India or will you like some of the other foreign investors do a rethink?

A: Absolutely to the contrary. Till three years ago, Deutsche Bank aspired to be a budget and investment bank. But the new stated intent is to be one of the leading universal banks in the world offering a variety of products and services for a diverse clientele. So in many ways, Deutsche Bank’s India model is being replicate in other parts of the world.

Q: What is Deutsche's Bank on equity markets in India?

A: We have actually scaled down our December estimate to 21,000 that still represents 8 percent of growth from hereon. If one sees what happened over the last 3-4 weeks, Indian equity markets did not suffer like equity markets in China, Brazil, Indonesia and Turkey. This is an indication that investors don’t have such massive concerns around future earnings of the Indian companies.

Q: Would you be wary of buying over-owned sectors like infotech or FMCG?

A: I think there is a reason for these valuations. If one sees what Hindustan Unilever did recently – it was very clear in terms of how representative it was of their thinking, of what the future upside in the market was and wanting to get more of the economic share of that.

Q: Is the FMCG sector really representative of India because this is where the sector where the government does not interfere too much?

A: I think more than government interference, it has to do with discretionary spending vis-à-vis non discretionary spend and discretionary spends do get impacted when the sentiment is down.

Our view on equities is positive and we think the medium to long-term growth potential for India is pretty much intact.

Q: Is the view positive across sectors or is it company-specific?

A: I would say that you can’t ignore certain sectors which have gone through a lot of stress. Clearly there needs to be some policy redressal — we believe that the infrastructure, power and telecommunication sectors will get sorted out.

Q: Are you a contrarian buyer in these sectors saying they are possibly at good, attractive valuations or is the time not right as yet?

A: We will wait a little on some of these sectors.

Q: What sectors are you bullish on?

A: We are bullish on the services sector, FMCG, and pharmaceuticals. I believe a lot of these sectors will actually make a come-back. India's demand hasn’t collapsed yet though it has diminished somewhat. There will be a revival in consumer durables and automotives as the sentiment changes. We believe that a rally in the future will be more broad-based.

Q: Is equity more attractive than debt?

A: We don’t have real view in terms of equity vis-à-vis debt. I think we believe that India is a great investment destination.