Prices of high end homes in markets like Mumbai have room to correct, and can correct, says HDFC CEO Keki Mistry in an interview to CNBC-TV18.However, he does not see much scope for reduction in prices of homes in the mid and low end segments.Mistry says the RBI may have leeway to cut interest rates by 50-75 basis points over the next one year, but much will also depend on how global events play out."My sense is given how low inflation is and given more importantly how the global economy is poised where there seems to be very limited chance of any sharp increase in oil prices or commodity prices, given all those factors my sense is that there is room to cut rates and quantum of rate cuts is very difficult to say but I would say 50-75 basis points with a 12 month view but this is obviously dependent on global events settling down," he says.As for banks reducing rates, Mistry said it would depend on the cost of funding for individual banks."We need to recognise couple of things, one is that banks sometimes have long-term liabilities and if they have a lot of long-term liabilities which they are taken in the past, then those liabilities till they get repriced, their ability to pass on any significant reduction in interest rates to that extent gets limited," he says. Below is the transcript of Keki Mistry's interview with Latha Venkatesh & Sonia Shenoy.
Latha: The first question is your associate company HDFC Bank’s big base rate cut. Do you think this is going to trigger a chain reaction in the industry, do you see other banks responding? They are all coming into the housing space?
A: I think every bank is going to look at its cost of funds and determine for itself whether it is in a position to cut rates and if it is in a position to cut rates, the quantum of reduction that it can bring about. So, it is very specific to each bank.
We need to recognise couple of things, one is that banks sometimes have long-term liabilities and if they have a lot of long-term liabilities which they had taken in the past then those liabilities till they get reprised their ability to pass on any significant reduction in interest rates to that extent gets limited.
Sonia: By how much do you expect the rates to fall, say in the next six months and if you can also give us your estimates for the next 12 months maybe?
A: If you ask me from Reserve Bank of India's perspective, my sense is that inflation has come down significantly which is obvious, the numbers are there for all of us to see. Wholesale inflation is running negative 4 percent, which is truly very high which means that the manufacturing companies are under some pressure. Retail inflation or consumer inflation is also very controlled. The only uncertainty going forward may be the monsoons but having said that we still have one month to go before we can really take a call that the monsoon is deficit or significantly deficit. So, let’s keep our fingers crossed but my sense is given how low inflation is and more importantly how the global economy is poised where there seems to be very limited chance of any sharp increase in oil prices or commodity prices, given all those factors my sense is that there is room to cut rates and quantum of rate cuts is very difficult to say but I would say 50-75 basis points with a 12 month view but this is obviously dependent on global events settling down.
Latha: Your own lending rates or even bank lending rates, how much will they fall, by an equal measure 75 basis?
A: So that is the point I made in the beginning that unless and until we start seeing or each bank will have to evaluate its own cost of funds and if it believes that it has a lot of long-term liability which will take time for it to get reprised downwards, then to that extent the rate cut or the passing on of lower rate cuts to the system may be a little delayed. It will happen, give it time it will happen but it will take a bit of time._PAGEBREAK_
Sonia: We constantly hear about unsold inventory piling up in places like Mumbai and Gurgaon and the resultant imminent crash in property prices. In your view is there any scope for prices to fall further. If yes, in which pockets?
A: India is a very large country and therefore it would be incorrect to generalise. So if you were to look at the high-end market in Mumbai, yes there is scope for prices to come down and I do believe that prices can come down a bit from here but if you look at the middle income market, you look at the low income market, if you look at the outskirts of big cities, again depending city wise, prices will generally remain at these levels. Can come down little bit in some places, can even go up a little bit in some places.
Latha: How much will your cost of funds fall in this fiscal?
A: My sense is assuming that the liquidity in the system continues to remain reasonably good; cost of funding should come off a little bit over time. Cost of funding has come off a little bit over the last two or three months and my sense is it may continue to fall. We would continuously keep evaluating our cost of funds and taking a call on when we need to look at changing our lending rates. If you see over the years we have always operated with very stable spreads. If you take March 2015, our spreads at that time were 2.32 percent and if you look at June 2015, our spreads were 2.31 percent. So we manage our spreads very closely and whenever we feel that spreads have gone high enough for us to warrant a reduction in interest rates, we will of course be the first to go and reduce rates.
Sonia: With regards to Standard Life hiking its stake in HDFC Life, is the share purchase over and is there any chance of them hiking stake further to say 49 percent?
A: No, they will not look at reaching the 49. The agreement with them is that their shareholding will settle at 35 percent. They are increasing their stake by 9 percent. The transaction is obviously not complete because it needs regulatory approval. So we need regulatory approval from Foreign Investment Promotion Board (FIPB), we need approval from Insurance Regulatory and Development Authority (IRDA) and we need approval from RBI. So that process is an ongoing process.
Latha: Probably they are not hiking their stock because your IPO plan is up and ready. When should we hear of it?
A: We would of course like to do an initial public offering (IPO) but my sense is the IPO would happen sometime in 2016 which is what we have been telling people for a long time. So, first the Standard Life transaction gets completed, then we look to file for an IPO and after we file for an IPO, we don’t know how long the time process will be because this needs approval from IRDA, needs approval from Sebi and being perhaps the first or at least one of the very early IPOs, both Sebi and IRDA will spend a fair amount of time looking at all the contents or the date which has been given.
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