In an interview with CNBC-TV18's Surabhi Upadhyay, Samiran Chakraborty of Standard Chartered Bank, discussed the outcome of the Reserve Bank of India's board meeting and said the central bank's focus is on deepening the bond markets and clearing up bank's balance sheets.
Below is the transcript of the interview on CNBC-TV18.
Q: What is your sense on some of the commentary that we have been getting in from the Reserve Bank of India (RBI) both in terms of the report that we got last week and what the RBI governor has said today?
A: Yes, clearly there has been a concern on the bank capital side as you had mentioned and it appears that RBI has been trying to address this issue by recapitalising the banks as much as possible given the limited fiscal space.
But what has caught the imagination of the bond markets also is the governor's very clear reference that there will be a twice a year evaluation of the foreign institutional investor (FII) limits on bonds.
That is something, which opens up the scope for limit increase, these are the comments that have also been very positive around that. So that is something which bond markets are looking at very closely.
Q: Give us your sense on the first part, on the bank balance sheet issues. We have got some numbers from the RBI report last week, where they are expecting asset quality to deteriorate further in the first half of this year before seeing some sort of a marginal recovery in the second half, would you agree with that trajectory?
A: What we are seeing is a kind of the tail part of this slowdown now passing through. So obviously the kind of biggest challenge of the economy stalling down completely, that challenge is over. We are seeing first signs of recovery and even the governor today mentioned that the capex cycle seems to be just about picking up but the legacy entries will continue for a while.
And that is why you will probably see in the first half -- some increase in the non-performing loans (NPL) situation whereas once this stabilisation becomes a bit broadbased, you will probably see things also turning to be better on the non-performing assets (NPA) side.
But it is going to be a long struggle without significant capital infusion to the public sector banks.
Q: So, do you think we will reach that point of inflection, the bottom of this NPL cycle by December of this year or do you think it could stretch a few more quarters further down?
A: It is always hard to predict turning points. They are notoriously difficult to predict. But, having said that, we think that 6-12 months, it will take for the investment cycle to get into a shape where you see the positive effects of that filtering onto the rest of the economy.
Q: And a last question on the other significant point you mentioned - FII investment coming into bond markets. There has been a lot of expectation that either the cap itself is going to be raised or maybe the dollar limit will be converted into rupee limit. Your sense on what the market wants to hear from the RBI on this issue.
A: Market will be pretty agnostic about how the limit is being increased as long as the limit is increased. But, yes, for a pretty long time, we have not seen this limit being changed and the limit has been completely exhausted.
So, at that juncture, the comment that the RBI will be looking at it twice a year, opens up a scope for some kind of a change in the limit, probably sometime soon.
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