Rupee still undervalued;see Rajan as inflation hawk: Kamath

KV Kamath, non-executive chairman, ICICI Bank while giving his take on the economic situation and Raghuram Rajan, says the new RBI governor besides being market friendly is going to be an inflation hawk. “Preventing the harm inflation could do the mass of Indian people is what that seat (governor) is supposed to do,” he says.

Kamath is the man who was single handedly responsible for creating India's largest private sector bank and a banker who has seen several business cycles.
Kamath feels the rupee is clearly undervalued today. The factors affecting the rupee could not just be demand and supply, especially considering its rapid movements of 3-4-5 percent in day or two. It could either be fear or outside factors that are playing on the rupee or it could be vulnerability. Also read: Inflation can't be fought with textbook approaches, says Kamath Below is the verbatim transcript of his interview on CNBC-TV18 Q: This Indianomics may well be Rajanomics because we have this new governor with brave new ideas bang on the first day of his getting appointed? What are your first thoughts on Rajan’s first moves?
A: I think it is in a way a textbook Rajan. If you look at over the past few years, what he has said about India when he has worked on Indian issues, he has got a very strong market’s approach to the whole thing. I think his time in Delhi has in a way seasoned him in the Indian context. I think it is a marriage of these two that I would expect him to bring to this role. Q: Since you spoke about markets, that whiff comes out in his financial sector reforms report and you knew him well when he worked on that report, what could be the main tenets of Rajanomics if I put it that way?
A: I was about to say that. Everyone of us needs to go back and read that report because that brings out his approach to how India should progress in a financial context and in that report there was a whole lot of freeing up that he was talking about and which I think the committee members endorse at that point in time. I would see that large part of that should happen now that he is in the seat. Of course tempered with his experience in Delhi because that will be invaluable to him in his job. Q: The report also gives an idea that the Reserve Bank of India (RBI) will have to be an inflation watcher - in fact it says it should not have any other goal. The report says RBI should go after inflation, so do you expect besides being market friendly he may also be inflation hawk?
A: Indeed he would be because this is a consistent policy that you have heard from the governors of the RBI that we are a nation of a billion plus people and so, preventing the harm it could do this mass of people is what that seat is supposed to do. So I am sure that that will be a paramount in his mind. Q: Let me come to the rupee's performance itself like someone was pointing out the rupee has jumped 6 percent since the new governor but the real (Brazilan currency) has also jumped 8 percent, the whole context has become a little riskprone globally. However, do you think that India still remains vulnerable that probably this risk appetite could very quickly be reversed with risk aversion?
A: From my perspective we need to understand what really is the issue with the rupee - Is it a true demand and supply issue?To me it is not as yet a demand and supply issue which is playing out in the way that we see movements, which are 3-4-5 percent in a day or two days. This doesn't happen with demand and supply.
This is either fear or outside factors which are playing on the rupee or vulnerability and I guess that there is a whole lot of speculation – an environment of speculation around the rupee which has pushed the rupee to a level which truly it should not be at. So rupee is clearly undervalued today.
I am sure that watchers will very carefully see what happens in this speculative environment around the rupee and what is it that the policymakers could do to spook it back as it were because at every turn, the rupee seems to be spooked or it was spooked.
I will not go into the real (Brazilian currency) issue but I think in the context of the rupee, if we started on the premise that the rupee is undervalued, we need to work out what we can do to get it to its right value. Q: One way of looking at the positive events on the rupee is that - that is a ‘Crocin’, which Rajan has administered, it has taken-off this fear and vulnerability probably but there are fundamental problems of a higher fiscal deficit problems of a current account deficit (CAD) - so do you think that unless the government delivers on diametrically cutting the fiscal deficit a dramatic diesel price hike we could still be in troubled waters?
A: Why would I doubt that the fiscal deficit would to where the finance minister has set it, for this year because he has delivered on everything that he has said. Therefore,  I start with believing that the number will happen and if that number happens then we get into a root and cause situation because is the rupee where it is - a cause or is it a root of our problem. We will need to work that out.
A whole lot also depends on policy making and the stance they take. The policymakers taking small step, maybe big step as they go along, and articulating that indeed we have tools could be what is required to fight these extra large doses of speculations that we have in the market.
_PAGEBREAK_ Q: Do you think the government has to deliver on hard decision like a one time big jump in diesel price hike to restore investor faith that they mean business?
A: It could be done in many ways. Petroleum price hike could be one but I think that on the diesel front, they were moving in a nice steady manner when the rupee appeared to go out of control. Let us see what happens to the rupee, and maybe a big increase is not warranted then. Q: Are you getting even a smell of investment anywhere or do you think that will happen quite candidly only after elections results unknown?
A: If you look back maybe last year or so, I have not been as optimistic as I used to be. So let me put it this way that I am now a bit more optimistic than I was three months back. Now the question could be why.
I think there are a whole lot of things being addressed in the last three months, which we can now see being addressed. This is one.
For one, it is the revolution of coal supply to those power plants which are set up but were starved of coal and I would think that given those plants which are now going to be lit and what is in the pipeline where work has not stopped, which should be completed over the next three years, our power situation does not appear to be as bad as it was just three months back.
Similarly, from what I could understand people have started getting clearances for various acts that they need to do in context of their projects. So talking to clients, one is  getting a slightly more comfortable feeling than we had a little time back what is yet to be done or what is yet to be seen – is that translating into project on the ground or a project on the front burner, we are yet to see that. I think we are probably three months away from that.
So, I don’t think entrepreneurs will wait a year or 8 months out for election results. We will see action happening. Entrepreneurs seek opportunity and if they see the right environment, they are going to try to seize it. For example, aspirations of people have not fallen off the cliff. Rural India is still ticking nicely. We have had a good monsoon, which means that value added industry in rural India will do well. These are the things that people will look for and they will seize opportunities within this space.
Infrastructure this time around may lag because in the last 8-10 years, infrastructure was the lead in terms of getting the economy going this time it may lag but again we need to have the consumer in, we need to have investment in to drive this wheel. I see the consumer probably getting in with a feel good that he is going to see in large parts of India. You still have the challenge of urban India and of corporate India which will get resolved in the next few quarters. Q: I don’t know if it get resolved, for instance, the mining or the iron ore ban is on, I haven’t still seen any even reasonably significant amounts of that ban being revoked, Coal India continues to produce coal only at the rate of 3-4 percent higher every year whereas the asking rate is like 30-40 percent higher than the previous years?
A: What is going to happen is that particularly on the coal front, we will need to continue on imports till we are going to get that equation resolved. So to an extent, not being able to export ore and importing coal will put pressure on the current account in the near-term but other than that we will see the investment cycle starting to pick up. Q: In which area, would it be rural demand kind of a servicing sector?
A: I would think that almost all manufacturing areas because we have been used to 14-15 percent growth in a manufacturing sector, which probably has now come to 5-6 percent but this is an economy where we should expect growth in the manufacturing area to get back to double digit and that starts the investment cycle going. I think that if the first signs of what is happening on the infrastructure sector do progress, we will see a momentum on that, which will again bring the investment in these areas. It will be multi-prong; it will not be a single sector. Q: In that context how do you look at the land acquisition bill? It is quite an onerous bill that land acquirers are faced with?
A: Very interestingly, if you look at the last few years, most of the capital expansion that has happened in the manufacturing sector has come as a Brownfield expansion. So we have not suffered from inability to acquire land. I think land acquisition will be important and critically important on the infrastructure side. That is where we will have to have the roadmap very clear. Within that roadmap, what is critical is to ensure that the whole process gets to be time bound and we will have to wait and watch how that works out.
Rest whatever is there in the bill, that will get done and the industry will come to absorb it. If it is an increase in cost then cost will be also be absorbed.  However, to me the critical part is making it time bound because without that you could then have a challenge going forward.
_PAGEBREAK_ Q: Do you see it getting time bound because so many approvals are needed both at the central level and at the state level, district level, village level?
A: At this time is looks difficult but let us see what process is set and how it works. If you remember, long back we thought the same about environmental clearances at one stage. But still the process was set. A bar has been raised for the environment, again the process will be set and we will manage to work within the pattern that has been set by this rule. The rule making that will come into force. We will have to wait and watch. Q: Finally as a banker or someone who is still very closely watching that sector, how long do you think we are going to get more and more NPLs, does it peak off next quarter, does it peak off the quarter after? It is not ending.
A: Let me put it this way. I have lived through at least one cycle as the CEO and I will only say this that this cycle doesn’t appear to be anywhere near as bad as that cycle was because that cycle, we had an economy which was growing only at 5 percent. It had not shown the resilience to go to 10 percent and then come to 5 percent as it has this time. You had balance sheet which you had leveraged 4-5 times in terms of debt to equity, you had a scale which was completely out of context in a global scenario and your quality, which was abysmal and inability to compete because your price equations are wrong. All those things have been turned around and the challenge is not as much as it was at that point in time from what I see.
What is also proven in 2000-2002 period is that in an economy, which has potential to grow, it was 5 percent at that time then it went to 8-9 percent and you have real assets - I think those assets get absorbed back into the system and that is why very wisely the RBI allowed restructuring during that period and the same policy continues.
As long as there is an asset, I would think it gets reabsorbed in this system. The worries bankers have is of an NPL where there are no assets. So, I think we will need to segregate where are productive assets and can they be reabsorbed into the system and where are very fluff, which is basically backed with no assets. As far as productive assets are concerned, they will get reabsorbed. We need not follow the western system where you try to sell them in a distress, 5 cents to the dollar, 10 cents to the dollar; our experience proves that these assets will come back in the near-term. Q: Since now you have command over another whole area of infotech, we are seeing that sector burgeon up again and hopefully because of very good or better than expected recovery in the US and even in Europe, can you give us some ground impulses that you are picking up, is it much better than people expected?
A: I am not a spokesman for infotech industry but let me put it this way, clearly the US as an economy is doing well. You should then expect companies to be in right frame to look at change, which IT brings.
Europe is showing green shoots, rest of the world is not fallen off the cliff; the exchange rate has worked in our favour. I would think that conditions are right for the IT industry.