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Last Updated : Oct 04, 2016 10:20 PM IST | Source: CNBC-TV18

RBI Monetary Policy: Cost of funds needs to fall for banks to cut rates, says Maruti

Post the monetary policy meet, Keki Mistry, VC and CEO of HDFC told CNBC-TV18 that the inflation expectations gave RBI impetus to cut rates.

In his debut monetary policy, RBI governor Urjit Patel announced a 25 basis point repo rate cut, which cheered Indian Inc and opened a window for private and public banks to pass on this relaxation to the borrower.

Post the monetary policy meet, Keki Mistry, VC and CEO of HDFC told CNBC-TV18 that the inflation expectations gave RBI impetus to cut rates.

He said that the new policy regime is likely to support liquidity going forward and sees rural economy growth improving on the back of good monsoon and the 7th pay commission.


In the same interview, RC Bhargava, Chairman of Maruti Suzuki said that the this rate cut won't do much for the auto industry as the sector is facing problems with increasing production.

He said that the rate cut will promote investment and growth but a lot depends on banks and how they pass on this reduction to the borrower.

Banks won't cut lending rate unless the cost of funds for them come down, he added.

Lower mortgage rate will boost the real estate sector and help tackle with the current oversupply situation, said Rajeev Talwar, Group ED, DLF.

Speaking to the channel, Kishore Biyani of Future Group, Anil Agarwal, Chairman, Vedanta Group and Naushad Forbes, President, CII outlined their views on the outcome of the monetary policy meeting.

Below is the verbatim transcript of the interview on CNBC-TV18.

Kritika: What do you make of this stance by the Reserve Bank of India (RBI), were you surprised with the cautious rate cut?

Mistry: I don’t think we were really surprised because we thought that there was a very strong likelihood of 0.25 percent cut in rates. Let us look at the macro environment around us; everything in India today looks so very good.

Current account deficit under control, fiscal deficit is under control, inflation has come down, rupee is stable, so, therefore there is some incentive that probably needed to be provided to industry in terms of improved sentiment and that coupled with the fact that inflationary expectations are reasonably manageable going forward, I think it has given the RBI the impetus to cut rates.

Now, what we need to bear in mind is couple things. This year we had very good monsoons and that could be another factor and the other is the expectation that the rural economy going forward will start doing a lot better than it has done in the last couple of years.

Prashant: The point about expectations of real rates, to that question the governor and his team said we are okay with about a 125 basis points odd or round about as far as real rate is concerned. Under the last regime, it used to be 150-200 basis points. That specific comment, do you think we should read too much into it or it is too close to call in terms of dovishness, interpreting it as dovishness?

Mistry: I think it is a little tough to call but clearly this stance towards lower interest rates, the stance that we are now going to look at growth with same degree of importance or some degree of importance and not only at inflationary expectation, I think these are some of the things which one can sense from the tone in which the policy has come out.

However, I don’t think a number like 125 or 150 basis points is a very sacrosanct number and you should just go by that number.

However, clearly the indication is that we will have a policy regime where there is plenty of liquidity which is there in the system, the idea is to promote growth, the idea is to promote investments.

I think India Inc will make investments in the coming two-three quarters and I would be surprised if I don’t see a big pickup in private sector investments in the near future not just because of the rate cut.

Prashant: It is not as if Maruti needed any help in selling more cars. You are doing perfectly alight without the cut and I can safely say that for this sector as well, but Maruti has been on the top of its game in terms of sales. But what do you make of the 25 basis points cut and what it can do for your industry per se?

Bhargava: I do not think it is going to do very much for our industry because as you said, we are selling everything we can produce. If at all there is a problem with us, it is a problem of increasing production. So, the rate cut generally for industry is good, I think everybody has been wanting rate cuts for a long time and the expectation is that rate cuts will promote investment, will promote growth. And conditions today are such that inflation should not be a risk.

Kritika: Taking from Prashant’s point, I understand that it will not significantly impact the industry per se, but would you be able to give us a sense of the kind of increase in private investment and growth that you can expect given that there will be at least some sense of increased liquidity into the system?

Bhargava: It will take a little time for this play through and it depends on how the banks pass on these rate cuts to the actual borrowers because in the past we have seen that rate cuts have not been followed by almost the similar rate cuts for lenders or borrowers rather. So, we will see what happens.

Prashant: But, in the auto sector, the one segment which benefits is passenger cars.

Bhargava: Both commercial vehicles also because if it is passed on, it will mean the lending rates for vehicle loans will become lower.

Prashant: You heard Mr Bhargava saying that they are selling everything that they can produce. Their challenge is actually to increase the production out there. You want to come in there? You began by saying that it is all in a way lining up for India.

Mistry: What I was trying to say is that it is not only interest rates which is going to determine investments. Investments is determined largely by the kind of excess capacity that you carry and the fact that you think you need to build more capacity. And as far as that is concerned, we are today in a position where clearly capacity utilisation is going to be a lot faster in the coming 6-8 months compared to where it has been historically.

And that I am saying on the back of the good monsoons, the pay hike, the government pay hike that happened to government employees, the amount of rural spending that we have seen in the current year.

So, what we have been seeing over the last couple of years, is that while the urban economy has been reasonably strong, it is the rural economy which has been lagging a little bit because of the poor monsoons and that will get corrected in the current year.

Prashant: We actually conducted a poll amongst the top-50 CEOs. This is two days back. Across industries, across sectors, across the country as well and to one specific question and this was the question which we put to them. Is high cost of money impeding growth? You would have thought that to a question like that, an overwhelming majority would say yes, high cost of money is hurting growth. But surprisingly, it was not the case. Almost 34-35 percent of those we polled said that high cost of money is not an issue. So, it very well echoes what you are saying.

Mistry: Absolutely, I do not think it is interest rates as much as the fact that people need to see that demand. And we will see demand picking up over the next 2-3 quarters and that to my mind will result in faster capacity utilisation which in turn, will lead businesses to make more investments.

Kritika: Then can we expect accelerated passing on of lending or deposit rates soon and how soon can you expect that?

Mistry: It is an ongoing process. When the RBI cuts rate, it is not that everyone’s cost of funding comes down by a similar number. So, if RBI cuts rates 25 basis points, the cost of funds of a bank do not come down by 25 basis points straight away. So, there is a time lag which takes place, you have to first reduce your deposit rates. As you reduce your deposit rates, your new deposit comes in at a lower rate.

Over a period of time, the old deposits get cycled.

So, this happens both on the way down when interest rates are coming down, it also happens on the way up when interest rates are going up. But clearly, liquidity in the system has been adequate, incremental funding costs for everyone has been a lot lower. So, my sense is you will see some degree of the rate cut being passed on to consumers over a period of time.

Prashant: You meet investors all the time and you got the real pulse of what are the dominating drivers at any point as far as investors are concerned, I am talking about portfolio investors. If I could just ask you for your thoughts on that, rates here going down at some point, rates for example in the US going up, I know that is a slightly question away from your sector per se but how would you kind of look at that?

Mistry: My sense is that the portfolio investors today are extremely comfortable with India. Globally they have seen that growth has slowed down everywhere; there is a likelihood of global growth further slowing down in the coming months, so, I think India stands out.

Fundamentally, our economy today is in very strong footing, I think I mentioned earlier current account deficit is low, fiscal deficit is under control, inflation has come down big time from the double digit levels we used to have to now much more manageable 5 percent. Rupee has been a lot more stable, why stable, it has actually appreciated over a period of time.

So, I think all the macro numbers look very good. It is just the private sector investments which have been slow to take off. My sense is that will happen once we start seeing increasing demand rising out of the fact that demand picks up and capacity utilisation picks up.

Prashant: Banks, when the question was put to them, RBI has cut rates, will you, they said we will think about it, there are other factors which are involved as well and you heard Keki Mistry as well but do you think under the new dispensation of the RBI with the committee, the government also part of the decision making process, the transmission process will be faster and more effective?

Bhargava: No, I think what Mistry said is very valid because the banks have to ultimately look at their own bottomline of the balance sheet. Unless the cost of fund goes down, they can’t really lower interest rates.

Anuj: Your thoughts on this 25 basis point rate cut of course for real estate companies they will be asking for more rate cuts and more importantly transmission but your first comments?

Talwar: I don’t think one should be so greedy as to ask for fresh rate cuts and more rate cuts. I think the Governor has made a very good and confident beginning that yes there has been a good monsoon. There is likelihood of a bumper crop and therefore lower food inflation. US Fed rates have remained unchanged and the right atmosphere to attract more foreign investments as well as greater confidence for the buyers within the country to now book properties hopefully, with the banks passing on some more of this transmission which has been conveyed today. There is enough with the banks to do so.

Greater push for liquidity and I am quite certain that with the festive season coming in already good sign for the fast-moving consumer goods (FMCG) sector and the automobiles. The next would be lower mortgage rates leading to a fresh burst of activity on the real estate and housing sector. Hopefully, with the supplies remaining large right now and an oversupply condition existing rates of housing would remain stable and only go towards being lowered for the benefit of the customers.

Prashant: You and your business over the many years kind of have been affected by high cost of money, interest piling up on the debt etc, it done you and your businesses and other businesses in your sector a fair bit of harm. Rates have gone down 25 basis points as far as the Reserve Bank of India (RBI) is concerned now of course banks have to follow through, but what’s your first reaction in terms of how this changes things for the industry?

Biyani: It is a well expected, very well guided move in a sense for us, because we are waiting for the signals when the rate regime start coming down. I think lot of things have come together and this was something which was waiting to happen. I believe this will be the tipping point for the economy to now take a different shape and which is going to upwards and we are welcoming this kind of a move and we are hoping for a further rate cut as time progresses.

Prashant: You are calling the today’s rate decision as the tipping point as a inflection point?

Biyani: It is a tipping point because lot of sectors have come together in the economy, lot of things have happened on the Pay Commission, with IDS and multiple things the government has taken lot of steps to revive the economy, but the interest rates were still not coming down. I think this was very, very much required and I believe this should be the final point in through which the economy will start now moving to a positive direction.

Kritika: But in that case would you say that this coupled with festive or a decent festive season that you have seen coupled with monsoon, would thereby lead to the tipping point with respect to seeing an actual uptick in demand?

Biyani: Absolutely. I believe that customer has to think good about something and he was not currently feeling good about the interest rates, lot of things happening around him was not positive and ultimately there is a cost which he is paying on EMIs and multiple things.

Now with the positivity coming about that interest rates are going to come down and there is a regime which will look at interest rates to boost the economy. I think we have been trying to hit more on inflation and interest rate has been linked to inflation always, which I believe sometimes 60 percent of India is dependent on farm income and a little bit of better prices to the farmers is not a problem to play for the consuming class and that should not be the only benchmark of looking at interest rate.

I think we have to revive the economy, we have to take it to another level and there are so many things which can be done to drive boost consumption and this is a very, very positive move.

Kritika: Would you say that this is significant enough to or are you hopeful that this is the first step in reducing the cost of money?

Biyani: This is a positive signal of a new regime and I believe this is a beginning of a reduction of interest rate, which has to now come about.

Prashant: You are sounding a bullish, but you have been a true go getter as far as business is concern and have never shied away from making your plans public and you are not shying away from telling us what you feel, so obviously you expect more the RBI will not hold on with this just 25 basis points, this is the beginning of many cuts in the future, so you do expect cost of money in the system to be substantially lower by over the next one year?

Biyani: As a businessman, as an entrepreneur we believe cost of funds definitely impairs business and the growth of any business and the plans to do new projects and the plans to do new business and overall if you look at from a consumer point of view, I think they have EMIs to pay and if their cost of borrowing comes down, they have some disposable income which can go into spending money on consumption item, which ultimately drives the economy.

Kritika: How much more of a cut would you want?

Biyani: I think we want the moon, but that’s not what we get, but I think positive step and moving towards a direction of getting a stable and a reasonably good interest rates to give lot of money in the hand of people.

Sherwani: Your reaction to the 25 bps rate cut?

Forbes: The 25 bps is very welcome. Indeed the way in which inflation expectations work out the actual rate cut is almost less important than the expectations of whether or not that is going to be a rate cut.

So, my own way of handling it is to not expect a rate cut and then if there is a rate cut as we had today that is very welcome and is a nice trigger for the economy going forward. So, it sustains the rate cuts that we have seen over the last year and half. We now have almost a two percent rate cut over the last 20 months or so and it will only enhance the performance of the economy going forward.

Sherwani: What about the cost of money? Are you hopeful that going forward that will drop significant bit or even just by a margin?

Forbes: It should, it will all depend on how well we perform on the inflation front. We at present as you know the government has set a target of four percent plus or minus two percent for inflation. We are currently tracking at around five percent and if this sustains over the next few months too that will form the basis for a further modest rate cut. But again I come back to my earlier point that the best way of dealing with this is to not expect a rate cut because if you expect a rate cut and then don't get one that causes problems for the economy. And if you don't expect a rate cut and then you do get one that only adds to the effectiveness and progress of the economy going forward. So, my suggestion is don't expect a rate cut, and be happy when we get one.

Sherwani: We have recently done a poll with 50 top CEOs with a question as to whether the high cost of money is impeding growth and around 34 percent of those polled had said that it is not an issue. What is your response in this finding and what does it tell us ?

Forbes: The key issue that the economy has been facing over the last few years I would say has been demand. And in the last six months or so we have seen a significant pickup in demand. This demand is not affected so much except for a few sectors like some of the larger big ticket consumer durables. So, demand is not affected so much by the cost of money.

As such we can see a significant demand pick and a sustained demand pick up in this without much change in the cost of money.

What needs to change though is the investment cycle going forward. What has been really depressed over the last three or four years has been investment especially private corporate investments.

For that to pick up going forward we need first a significant sustained pickup in demand. We have got the beginnings of that now and if that sustains for the next six months too then we will start to see a robust pick up in investment.

As investment picks up then the cost of money becomes critical because a lower cost of finance then only enables so much more investment and capacity creation to happen in the economy.

Kritika: Your initial comment, your initial reaction and the impact on corporate India of this cautious cut of 25 bps?

Agarwal: I really welcome this move and very quick move. I congratulate Reserve Bank of India (RBI) governor to do this. I am looking forward this 25 bps, means a lot and only thing I am looking that this should pass on right direct to the bank and banks should pass on to the lender, it is very important.

Kritika: Do you believe that this will in time - is this 25 bps enough to bring down cost of money, how much more would you expect from the Reserve Bank of India (RBI) in the next coming months?

Agarwal: On an average I would say in general it is a question of our investment. The investment has to come in a big way in India with this government. If you look at the foreign newspapers, I was in US I could see the positiveness of India and the Modi government. It is phenomenal, the money is coming but it has to get into the capital bringing the investment into the building of the factories, that is very important.

Prashant: Forgive me for being specific here but could you just give us an idea about Vedanta Group total debt. Of course these are imperfect calculations to do but say, rates essentially drop or actually if you can talk about rupee debt at Vedanta which will get impacted if borrowing costs drop, not 25 but say another 25, total 50. How would that change things for you, for the group essentially. I am not looking for specific numbers here but broadly, what kind of difference will it make?

Agarwal: If you ask Vedanta specifically we have more of a foreign debt in our books, Indian banks debts are less. But overall it will definitely impact, every drop helps. And perception, the whole thing, one is real. But I tell you if this thing is to look at the perception the developing country is more about perception, people will start believing now that the interest rate will be allowed in rupees 5-6 percent..

Ekta: What is your expectation in terms of future rate cut, because while this has been a rate cut of 25 basis points, it’s been largely called cautious because the statement was not as accommodative as what was thought earlier?

Parthasarathy: Yes, it was this particular policy watch was not only a policy watch, but also a personality watch and we are gauging the colour of their thoughts, which is both MPC and the governor and in a sense a watershed moment, so clearly we are all reading into what all that meant, but to my mind both the MPC and Dr Patel have had a great jugalbandi to come out with a 6-0 vote in terms of what cut and not only a cut, not the commentary alone but also the question and answer, very clearly kind of says that there is accommodative and growth oriented accommodation.

I would kind of say that I think that there is possibility and headroom for further cuts going forward.

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First Published on Oct 4, 2016 04:50 pm
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