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Rupee volatility keeping FIIs away: Deepak Parekh

Deepak Parekh, chairman, HDFC, has warned that a downgrade was likely if the current environment of policy paralysis persisted. "If downgraded to junk status, we will see substantial outflows," he said in an interview to CNBC-TV18.

August 28, 2012 / 19:24 IST
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As the economy grapples with a slowdown, there is growing fear of India’s sovereign rating being downgraded. Deepak Parekh, chairman, HDFC, has warned that a downgrade was likely if the current environment of policy paralysis persisted. "If downgraded to junk status, we will see substantial (foreign money) outflows," he said in an interview to CNBC-TV18.

According to Parekh, the government needs to urgently resolve coal, power issues. He is still hopeful that the fiscal deficit can be reduced, if the government increased diesel price or announced some other measures to lower subsidies, post the monsoon session (of Parliament).

But he cautioned that token diesel price hike would not be enough and that the country needed a roadmap to resolve coal, power issues urgently.


According to him, India can grow 6-7% if some basic reforms are undertaken.


On monetary policy, he said the RBI was putting more money in circulation by Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) cuts. RBI cannot cut rates unless inflation trends lower, he added. The central bank in its April-June quarter monetary policy left the key policy rate unchanged. However, it cut the SLR to 23% from 24% earlier.

Also read: No fast growth rebound for India amid downgrade fears

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee.

Q: Last couples of time, when we have spoken, you have sounded distinctly cautious and almost downbeat. Does that describe your frame of mind even today or are you feeling a bit more hopeful?

A: I am a bit more hopeful today. I am aware of the fact that the government is seriously looking at this impasse on power projects, coal and gas. There are lots of meetings being held. You will find some solution. I am hoping that after the parliament session some correction in fiscal deficit will happen where the government will increase diesel prices or bring down the subsidies. The crude has gone up again. We cannot afford more than a certain amount of subsidy in each sector, whether its food, fuel or fertiliser.

I am a little disappointed with the way parliament monsoon session is going. You can expect a debate and discussion in a democracy. But what we are seeing is disruption and dislocation. Democracy doesn't mean you disrupt things. I am unhappy with the attitude, some of the Member of Parliaments (MPs) walking out and no business being transpired. We have large number of bills that need urgent attention, that need to be passed.

If the government is unable to pass any of those bills, we lose the monsoon session, which is anyway coming to an end shortly. We are losing time. These are very essential bills. So, I am disappointed with the proceedings in parliament and the way the MPs are behaving and the way we do not see any progress. But, at the operating level, at the bureaucratic level, there is a sense of urgency. I see a sense of urgency among some newer people who have come in government of tackling situations, tackling problems.

Q You are right their intent has been positive, but will they be allowed to do anything? Since the Prime Minister himself held the finance portfolio for three-four weeks and then Chidambaram held it for a couple of weeks before the parliament session started off, yet we could not even raise diesel prices by Rs 3-4. Does it tell you that their intent is in place, but politically or for whatever reason they may not bring to fruition what they think is right?

A: I think we need to give them time. We need to give our finance minister Chidambaram a month or so after the parliament to see whether he is able to do it. If he is not successful in reducing deficit or increasing some prices or reducing some subsidies then we have no other option. But I think then you cannot continue to govern like this. All the deficit numbers, financial numbers will go crazy. You will be downgraded for sure, if that happens.

I think the bigger fear today is that rating agencies will look at us in October end, after the six monthly results, what the fiscal deficit is, what the growth is and what was agriculture like in the six months after the monsoon. And if we don’t have good story to tell, we could be downgraded. There is this fear that if India is downgraded to junk level then large amount of money will go out because funds are not allowed to invest other than investment grade securities.

I think this is a fear that the government realises. It is this fear that will make them act. And even if some coalition partners don't agree, they will still have to go ahead with it because the consequences of not doing it are far worse than doing it.

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Q: We can debate what the rating agencies are doing. But do you see that as a real threat and do you think that it is a possibility? But if we do get a small diesel price hike and some small tinkering from the government, will it be enough to stay the hand of the rating agencies?

A: I think you need to give a roadmap also. You can't just do Rs 1-2 and say now rating will be positive. You have to give a roadmap, what is the subsidy you are willing to bear on fuel, what is the subsidy you are willing to bear on food, and work backwards. This is the way to do it because then you know that this is what you can afford. What you can't afford, which really takes the fiscal deficit at much higher levels, you have to pass on those.

I am hopeful. I have talked to a number of people in Delhi. I think the bureaucracy also has started working. I feel they are genuinely interested in solving atleast the power problem. After the blackout we had, power, availability of coal and gas have become the top priority.

Q: The market hasn’t done too badly on the hope and expectations that you alluded to. But when you talk to a lot of business people, on the animal spirit meter, where are things right now? Are businesses also feeling hopeful or are they waiting and watching?

A: They are waiting and watching. The concern, even foreign investors have, is the level at which rupee could go down. If they send money to India today and the rupee devalues or comes down by Rs 2-3, they straightaway lose 5-10% of their investment.

If there is some stability in the rupee, more money can come in. We have seen fair amount of money come-in in this calendar year. But the strengthening of the rupee or keeping the rupee at the present level is absolutely necessary. It can remain at this level, if the fiscal deficit issue is tackled to some extent.

Q: How much longer do you think we will need to grind in this 5-5.5% kind of a gross domestic product (GDP) number, which is below trend? Do you see a solution once some news or some information action comes from New Delhi or do you think this will be a problem for a few more quarters?

A: I think it will be a problem for a few more quarters. There is no political consensus on anything. There are fractions, within the ruling party, that do not agree on so many different things. So, how can the single largest party in the United Progressive Alliance (UPA) II take a decision, when their own partners have different views? There are three-four partners with less number of seats, 20-25 or even lesser, have a strong view. They oppose decision making. So, it’s not that lack of trying by government. They are helpless because of the attitude and the behaviour of some of their coalition partners. This is an eye-opener for all of us.

A six-ten member coalition partner can hold the country to ransom on certain economic fundamentals that need to be done, some decisions that need to be taken. Can we afford to subsidies fuel to Rs 1-1.5 lakh crore? We cannot. We do not have that kind of resources within the country to keep on taking more and more deficit and keep on subsidising fertiliser, food and fuel. We do not have the resources. Do we want to become bankrupt? I think this realisation is not coming.

Q: We have had 10 years of coalition government and ruling and we have not made much economic progress. All the recent polls seem to suggest that is probably the outcome in 2014 again. We will probably be presented with another coalition government, maybe even a more fragile one, a fragmented one. What happens to policy making then?

A: We used to say earlier that despite government, India is growing at 7-8%. Change of few rules, get some raw materials available and Indian industry and Indian people will see the growth come back. There is enough innovativeness, there is enough initiative, but they want some ground rules. They need some help from the government. Then government can keep on fighting amongst their partners. But clear some of things. We will see more money come in. We will see lower deficit.

Settle the coal and gas issue, it will clear so much of the restructured assets of the banking sectors. These companies, which have invested in plant and machinery, are closed. We are short of power. Andhra Pradesh, I am told has 14 hours blackout everyday. How can you grow? You have to do something. And if the government does just a few of these things, let new initiatives not be taken, India will growth despite the government. We can come back maybe not to 9-10%, but atleast to 6.5-7%.

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Q: You have seen many slow investment cycles in the last 20 years. What are the chances that you are giving it that this time it might turnaround in the next three-six months like we did turnaround in 2003, but there we had a global impetus as well? Do you see the investment cycle turning any time, say by 2013?

A: Consumer credit is very low in India compared to other countries. Consumer credit has to grow. Consumer credit really starts spinning the economy. I think banks are all vying each other, competing with each other to give consumer credit.

In housing, we don’t see a slowdown in residential housing. There is certainly a big hit and a big slowdown in commercial and retail and malls, but in housing the demand is still insatiable. If the prices are right, deliveries are there, people are willing to invest their savings and borrow to buy homes. Our growth, in the Q1 this year, has been over 20%. Our average loans are Rs 18-19 lakhs, it is not high. So, affordable homes within the reach of a middle class, lower middle class, if the supply is available, people are willing to buy.

Consumer credit, be it in the form of two wheelers, tractors, mortgages, housing, I think there is a huge demand. So, consumer credit can start the demand and can start the growth. I know large number of international or atleast four-five international companies who are willing to bring in USD 500 million to two billion dollars each.

Aviation is a single point. Aviation companies are dying in India. Can you imagine India without a single private airline? What chaos will be there, if Air India, Indian Airline and private sector just stop because they are all bleeding heavily? For one-year, we are discussing 49% of equity in aviation. We don’t have the courage or we don’t have the gumption to get it through. You will get it through when two-three airlines will be dead, and cannot be revived and no foreigner would be interested in investing. It has gone so bad. We don’t have the sense of urgency in anything. That is the frustrating point, according to me, and this realisation is not coming to our politicians.

Q: Where does the Reserve Bank of India (RBI) fit into this scheme of things? Do you agree with its stance that it can only do so much and the government has to move first, it cannot get into a loose monetary policy regime that can stoke investment?

A: The Reserve Bank of India has a point. They saw consistently borrowings by banks on daily basis from RBI. So, they reduced the statutory liquidity ratio (SLR). First, they reduced cash reserve ratio (CRR) and then they reduced the SLR. So, they are doing their bit by putting more money in circulation.

So far as interest rates are concerned, all of us would like lower interest rates. But interest rates are not something that the RBI can bring it up and bring it down every month, up and down. It creates a lot of issues among the banking sector. Millions of borrowers’ loan amounts changes, installment changes. So, unless they see a trend that inflation numbers are coming down on two-three quarters, I do not think they can bring interest rates down.

You cannot bring it down because one month the inflation is lower. You have to see some trend, it has to be sustainable. The RBI must seem positive that in the next two-three months it’s going to remain the same or come down. They cannot bring down interest rates and bring it up again in one month. There has to be a trend. This trend is not visible to all of us.

If we say that diesel prices or petrol prices will go up or some of these prices will go up then the inflation is unlikely to come down. Freight itself will go up with diesel cost, which will be passed on to the consumers. So, inflation numbers are unlikely to come down with the bad monsoon. The food grain prices have shot up, vegetables have shot up. So, I do not see RBI has the ability to reduce interest rates now, although everyone wants them to do it. And you cannot have a loose monetary policy.

first published: Aug 28, 2012 11:07 am

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