RBI should ask why banks are not cutting rates: Dimensions

The Reserve Bank of India (RBI) should pull up banks for not passing on the rate cut benefits to consumers, says Ajay Srivastava, CEO of Dimensions Consulting. Despite repeated complaints from the industry banks have been reluctant to pass on the benefit of rate cut to corporates and retail borrowers.

“They (banks) had a huge CRR cut. But there is no pass back of the CRR benefit. There is no pass back of the rate cut benefit. That’s what I want to see in the RBI statement. Is there a cartelization by the banks to say that they will not reduce the rates?” Srivastava told CNBC-TV18 in an interview. Also Read: RBI should not let rupee volatility sway rate cut decision Srivastava does not buy banks’ argument for not cutting rates on high fixed deposit rates. “They (banks) have the highest NI in the world today at 4 percent plus. They cannot argue that the margins are low. The margins are very high,” he says. Finance minister P Chidambaram on Thursday said that he has called a meeting of PSU bank chiefs and would persuade them to pass on the benefit of RBI rate cut to borrowers. However, the pressure is mounting on RBI to cut the interest rates to boost industrial growth, which declined to 2.2 percent in April. Though Srivastava is not betting on a rate cut, he is hoping for a roadmap for interest rate reduction. In terms of market action, he expects the market to fall again after a relief rally, based purely on global factors. In fact, he says the upcoming FOMC meet is far more important than the RBI meet. Srivastava, who has almost no exposure to Indian stocks, says the collapse in bluechips indicates market is not healthy. "It was unbelievable to see the collapse in Titan and Tata Coffee. We have advised investors to stay away from markets," he told the channel. However, he says Titan can be a good value buy provided some policy clarity emerges. Below is the verbatim transcript of Srivastava's interview on CNBC-TV18 Q: Do you see more downside in the near term or do you think 5,700 level on Nifty will hold out? A: We should expect the downside to again come back to the market post this relief rally globally. We are now a victim not of local fundamentals anymore but what is happening globally. Yesterday, the markets went up all across the world, so we are going up. So, we are now very clearly proving to be a function of global liquidity. Therefore, to say that local factors including the credit policy will make a major difference? I wonder if it will. If the global move becomes better, Bernanke extends the Quantitative Easing (QE) on June 19 meeting then things will look lot better. But if he talks of tapering liquidity then we saw the volatility in the markets. So, we have now really aligned ourselves to the global markets on the emerging market side, and we will go up and down, depending on what happens on the June 19 meeting rather than what happens on Monday. Q: How would you be positioned now, would you be a bit cautious with your portfolio, do you think we have seen the best of the rallies at 6100? A: About 15 days back when we spoke we had taken a call that we don't want to do anything much in the Indian market. The call remains by and large the same at this point of time because the structural adjustment to this 59-58 to the dollar, the structural adjustment of flows not coming into the country in a robust manner, is till to be factored in. Now, if you factor in those and on top of that you saw the HSBC reduce the growth rate to 5.5 percent, consumer demand, may be anecdotal evidence that you are seeing is falling off the cliff literally. And I like what the Finance Minister (FM) said yesterday that you are asking the government to spend the money, the consumer demand is just collapsing in the market across all segments, at least the discretionary demand. If that is what is going to happen in this quarter and may be the next quarter then you are asking about serious trouble on the side of Gross domestic product (GDP), growth, velocity of money etc. So knowing the fact that consumer demand is so low, knowing the fact that government is going into the election year, the fiscal expenditure will be under stress, they will have to spend some money at least no matter that they say - the whole thing is not panning out to be greatly positive on the fundamental side. So if liquidity also goes negative, it is a lethal combination. The second worry is that what we saw in the last 48 hours that the so called blue-chips got hammered in a manner we never saw before. When you look at Tata Coffee and Titan Industries, what happened to them is unbelievable. That means there are no holy cows in the market, so the whole concept of being defensive. Yes you can live with MNCs because they will not collapse, there is a reason for them not to collapse but any other stock is game in the market, which tells you that it is like a thin ice – if there is slight pressure and the ice gives way and you are in the water. So that is not a healthy market. Healthy market is where the strong counters face the downside in a much better manner than what we saw. Q: So you have started liquidating a lot of your positions and taking them to cash over the last few days and you think there would be more damage to stocks over the next few months? A: Our own portfolio is almost zero on Indian stocks more than 15-20 days back and we continue to be on a very low holding. We can name one-two stocks we hold at this point of time, everything else is in cash. There could be a relief rally today. But the other problem is the gap-up - how do you capture this? You have seen everyday the stock either gaps down or gaps up. The market gapped up at 1 percent. Now at 1 percent gap up you really have less cushion to play with the market. In terms of pure investment portfolio we are almost down to zero and saying this is a market to stay out because locally we are not comfortable, globally we are uncertain so risking your capital at this stage is not the best idea. So doesn’t matter what stock it is. Earlier we could say HDFC Bank buy and keep you will not fall down but even that stock took a 10 percent beating in the last one month. So, keep away from the stock market because we simply don't understand what the next step is going to be - it is going to be down, up, global changes? It is given that Indian fundamentals are weak; global liquidity is there but uncertainty we cannot plan. _PAGEBREAK_ Q: What would you do with Titan Industries after the 25 percent fall? A: It is a good value buy  and a good company by and large but the reason we will not touch it is because there is lack of clarity on what the regulatory change means to the industry. Once the clarity comes there, demand will come back to the stock. I think it was oversold, it touched almost Rs 200-205 and it was hammered quite badly, sold by a lot of high net worth individuals (HNI) at that point of time. So, it is a good value buy but there is got to be clarity on what the government policy is going to be over a longer term. We are seeing too many knee-jerk reactions on the gold problem, to the jewellery issues etc. Once you consistently give a policy then you can evaluate Titan. Tomorrow, if you say ban the gold imports or raise the duty to 20 percent then that stock will collapse to Rs 150 at the end of the day. So how do you buy these stocks today because you don't even know what is going to happen tomorrow. Titan falls in the bracket where clarity on policy should give it a leg up because it has been oversold but if tomorrow government goes more hammer and tong on the gold side of it, I think you could see Rs 150-160 on the stock. Q: What about a stock like Apollo Tyres and the reaction it got from the market yesterday? A: It was a correct reaction it got from the market. When you do a 100 percent leverage acquisition, there is no doubt that this stock should have been where it is that is 25 percent down yesterday, I missed shorting it. It should be shorted and it will find lower levels. There may be a short-term relief rally, but I think Apollo Tyres will head much lower than this because 100 percent leverage acquisitions do not work. These companies are in for trouble, they don't understand what they have got into. Therefore this stock in my view longer term should be closer to Rs 50 and not closer to Rs 100 as most people believe the recovery will happen. We believe there is still more damage to come into the stock, it should travel to Rs 50 at the end of the year. So, if there is a pullback it is a good shorting candidate rather than going long. There is not reason to go long in the stock because the debt burden will kill it at the end of the day. It has paid a huge price for the company which was in the market for over a year, 40 percent premium for a stock, which was lying around there in the stock market forever. It is a bad buy; it is a bad structural deal at least for equity investors and may be not for the promoter. Promoter has become a grand world wide player, it is good for him but for equity players this stock is heading to Rs 50 in our view in a year’s time. Q: Your point on consumption trends falling off is interesting in the sense that a lot of these stocks as well like Jubilant Foodworks; Titan Industries that you were talking about, Future Retail, all these stocks were at 52 weeks low. What else would you sell down at this point from this clutch? A: The question we keep answering is what we should buy. Generally speaking, in the Indian market, I don't think we have too many stock holding left with domestic investors. The question is at 52 weeks low - should we now go and buy - No we cannot go and buy because the consumption is just collapsing and the big question is how it is going to be revived. Can the government do anything to revive the consumption demand - I don't know the answer, perhaps no. May be a good monsoon will trigger something but will that be very significant? No. So a 52 week low is a matter of statistics. The question is whether there are hopes that these companies will do better? The answer is perhaps no, till we reach the Diwali quarter where some hope might come through. Q: You mentioned Tata Coffee. Did you buy that fall? A: No. Sometimes when you get cynical and negative you miss out lot of stuff in the market. We didn’t buy it, although it was a good buy. I think Reliance Capital if I hear the reports correctly bought a significant part of it. It is a good stock. Sometimes, we don't understand when these stocks start to fall 20 percent and don’t give a buy order because you don't understand the dynamics of the market and why the stock has fallen 20 percent. _PAGEBREAK_ Q: What about Infosys. Have you been tempted to buy that after the recent newsflow or have you stayed away? A: Our stance remains consistent; it is not a buy at anytime till we see the June quarter. Our belief is that June quarter should tell us the damage in the company. I respect NRN Murthy as all of us do but I don't think it is a one-trick pony and that is what is going to turn this company around. Yes he is going to improve it but I don't think he is going to turnaround the company dramatically. We saw it went to Rs 2,700 the day he joined, it is back to Rs 2,350-2,400 that is the range it is going to travel in. We need to wait to see the June numbers, to see how bad the situation is and therefore is valuation of even Rs 2,400 optimistic or should be take it down to Rs 1,900-2,000. I have a doubt that June quarter may give a lot of negative surprises so we have been keeping away from it even after the bounce back. Q: Any potential from the primary market, there have been a couple of government divestment faces and Just Dial got a good reception the day it listed, any thoughts on those ones? A: Government stock buying doesn’t make any sense at all. We are seeing what is happening across the board, everything is in shamble so no point buying government stocks. Just Dial is a good stock and I am surprised in India why more companies are not coming into the primary market. US has done 80 IPOs this year till June against 78 for the whole calendar year and 72 percent of the IPOs are over 20 percent up, in the year itself. I wonder why Indians are afraid to come into IPOs, may be Just Dial will give them support to do it. However, government IPOs I don't think is a buy at all at any stage at this point of time and certainly not in the election year. Q: What are your expectations from the Reserve Bank of India (RBI) on Monday and do you think it is something which the market should be focused on at all? A: We are looking at two things. First, is a one line statement which the Finance Minster made yesterday saying that we need to talk to the banks to ask why they are not passing on the benefit of rate cuts? More than the rate cuts, they had a huge cash reserve ratio (CRR) cut. CRR was almost at 2 percent interest and they got to lend the money to the market. So there is no pass back from the CRR benefit, there is no pass back from the rate cut benefit. I think that is what we want to see in the RBI statement – is the cartelization by the banks, to say that we will not reduce the rates and give the argument that fixed deposit rates are not going down, etc. They have the highest net interest income (NII) in the world today at 4 percent plus, they cannot argue that the margins are low, margins are very high. So, will the RBI move on the moral suasion side to say cut the rates in the market, cut the benchmark rates? I don't think RBI will cut the rates because we all know why it cannot cut the rates but that is where we are going to see that will it persuade the banks to bring the rates down. Second, will it recognise the government’s’ ability to do the fiscal deficit and at least give a roadmap to interest rate reduction. I don't think it will do it this year but a roadmap could be in order. So, these are the two things critical in the policy. Q: How much of a hit has the recent run on the rupee made on equity market sentiment? A: I think it is huge that is why I said it is a structural transformation which scared the people; the fall actually scares the people that is it something which is plausible. 2-10 percent or 8 percent in a month, I cannot even remember when it happened last. So it has to be a big dampener because none of the analysts in the market have been able to transform saying this change will translate what to the economy and what happens to the earnings per share and which are the companies that are going to get impacted etc because everybody has borrowed external commercial borrowing in the last one year because the rupee was stable to the dollar. Now, what is going the June 30 balance sheet going to look like with huge hits on the Profit and Loss account? I don't think we have factored that in but the scare is there, the specifics are still being worked. Generally speakint it is going to be a big hit on the balance sheet, it has to be because last valuation was 55, this time we are at 57-58, so you got to do the 5-6 percent math on the balance sheet in the P&L account so that hit is coming in the June quarter.