S&P's possible action plan a wake up call for India: HDFC

Keki Mistry, vice chairman & chief executive officer, HDFC, says that the downgrade fear is exaggerated. The current signal from S&P is a wake up call for the economy and if the macro factors don't respond to the call, then in the long term there is a possibility of a downgrade. He also says that India is still an attractive market for foreigners with possibility of deep product penetration.

"Currency is the biggest challenge before RBI. Interest rates will follow inflation and inflation will follow the currency." said Mistry. Below is the edited transcript of his interview. Also watch the accompanying video. Q: S&P statement reiterates the macro economic challenges that India faces and states that India could be the first among BRIC countries to be moved to junk status; do you believe this fear has been exaggerated?
A: Yes, the fear is exaggerated. There is no denying that there are fundamental issues like high fiscal deficit, high current account deficit, week currency etc is affecting the country. What attracted foreigners to India in the first instance 10-15 years ago have not changed. India still is a very young country. 
Penetration levels of various products in India are extremely low and therefore the growth opportunities itself in the domestic economy are very high. As long as oil price remain at current level and don’t get completely out of control I don't think we will get a downgrade. Q: Do you believe on the basis of what we have heard from S&P today that the possibility of a downgrade has moved up?
A: I hope this is a wake up call and we take cognisance of that. We start looking at the fiscal deficit and current account deficit little more seriously. Because of lower oil prices the current account deficit looks little lower going forward.
However, at the moment there is no view that in the next 10-30 days we will see a down grade. In the long term, if there is no improvement on macro fronts then there is a possibility of a downgrade but in near future I don't think so. Q: How do you see the Reserve Bank reacting to this? Does this quiver the pitch further for the reserve bank which is already trying to precariously balance growth with inflation, with weak IIP, with the current slow down, does this make the job harder for the Reserve Bank when it has to act on June 18?
A: According to my view, currency is the biggest challenge before RBI. Interest rates will follow inflation and inflation will follow the currency. So, if we can get a stronger rupee; the rupee has weakened significantly in the last two months.
Two months back, oil prices were USD 120 per barrel and the rupee was 48 to the dollar, in March. Today, oil prices are sub USD 100 per barrel and the rupee is nearing 56, so we have seen a 20% decline in oil prices which logically should lead to an appreciation of the rupee and not a depreciation of 20%.
So, if we control and appreciate the currency then couple of measures are possible. Automatically the cost of imported goods will start coming down, oil prices in rupee terms would look lower, inflation would start looking down and that would give RBI much more elbow room to cut rates. Q: Do you believe that there will be a rate and CRR cut on June 18?
A: With weak growth there is a possibility of rate but, but it will not be a very massive rate cut. We probably could see a 25% cut in the April and a 25% reduction in CRR level, with rupee at 56 there is limited room to do much more. Q: How do you see the currency reacting? It touched 55.73 after the S&P release?
A: A fair amount of speculation is taking place in the currency. In real term, importers are covering their foreign exchange requirements for the next 3-4 quarters whereas the exporters are not selling the dollars. There are many people who are running short in the rupee position. So, if these imbalances can be corrected.
If the rupee was to touch 52-52.50 levels either by telling the oil companies to buy their foreign exchange requirement directly from the reserve instead of hitting the market every month to buy a requirement and if we see some RBI intervention in a very aggressive manner then one can see the rupee appreciating to 52-53 levels.
At 51 levels, one can see exporters coming in and selling their foreign currencies and that could bring the rupee to 50 levels. I think, 50 is the fair value for the rupee, not 55-56. Sentiments would get a lot better at 50. One can see money coming back to India and you will definitely see oil prices getting lower in rupee terms and therefore inflation getting lower.