Rate cut will ultimately improve investment cycle: Keki Mistry

Keki Mistry-HDFC-1200In advanced economies, central banks go ahead with 10-15 bps rate cuts. Back in April, it was RBI Governor Shaktikanta Das who had talked about out-of-the-box thinking and that is exactly what he had delivered — not 25, not 50 but a 35 bps rate cut. How are you reading into this?
It is not very different from what one would have expected in the sense that one would have normally expected a 25 bps cut. A 50 bps cut frankly was asking for too much in my view. 35 bps is probably the best number that they could have come to. The rate cut reflects the slowing down of the global economy. It reflects the comfort that RBI has on inflation taking into account whatever we have seen on oil prices. The fact is the price of Brent crude has come down globally because global growth has come down.

What does this cut mean for the industry as well as growth? When you are saying RBI seems to be concerned about growth, that is exactly what they have said in their statement that addressing growth concerns by boosting aggregate demand especially for private sector assumes highest priority for them. What is the prognosis one should take out of this on growth estimates as well as the way demand is going to pan out from here.

Demand is not a function of interest rates. Interest rates improve sentiment but by itself, interest rates are not going to change demand very positively or very negatively. Sentiments improve a lot when interest rates come down and sentiments boost investments. If the investment cycle in India picks up, more jobs get created and that automatically will result in consumption picking up in the economy.

What about transmission of the 35 bps rate cut? The governor in his commentary said that transmission of policy rates to the weighted average on fresh rupee loans of banks has only marginally improved since the last MPC policy. Would the transmission come in with the lag?
Transmission will always come in with a lag for the simple reason that when the RBI cuts rates, it is not that straight away the cost of funds of a bank fall. What happens is that over a period of time, liquidity in the system improves. As liquidity in the system improves, funding cost per se come down. As liquidity improves, banks become more confident of lowering deposit rates and it is only when they really lower their deposit rates that their cost of funding comes down and they are able to transmit the lower rates. So the transmission comes, but with a bit of lag.

You recently adjusted your lending rates as well but after this 35 bps cut would you be bringing down rates further lower?
I just explained to you just now that we would look at how cost of funds pan out, cost of funds do not change the next day when interest rates are brought down by RBI. As and when cost of funds comes down, we will do it.

Over the last couple of days we have seen big industry veterans talking about how growth has been a big concern for them. L&T’s AM Nayak said that 50% of the industry has not been able to invest. Do you believe that a 35 bps rate cut plus all the action that the government intends on taking is going to help revive the sentiment for the private sector?
We have to wait and see what the government does but at least the fact that the government is meeting industry people — from what we hear and from newspaper reports over the next few days — is definitely a big positive. I guess once the government understands what issues the industry is facing and start addressing these issues, the investment cycle in India can pick up because structurally India, is in a sense, an economy which is waiting to grow and it can grow very well because of the demographics.

I have no doubt in my mind that investments will pickup. We need some action from the government in terms of addressing some of the concerns that industry has got. As far as interest rates go, what we must understand is that there is enough liquidity. Liquidity in the last couple of months has significantly improved in the system. Today the issue is not so much of liquidity, the issue is more in terms of risk, the issue is more in terms of banks being very cautious about who they want to lend to and when they want to lend to and stuff like that.

The other issue is of course, what is happening globally with respect to trade wars and also a fear that this could lead to currency wars as well. Given what happened over the last two days in the global currency market, what kind of impact do you see that is going to have on the Indian economy and the RBI’s estimates for our own growth as well?
Well first what we must understand is that the Indian economy is largely dependent on domestic factors and not that much dependent on what happens in the rest of the world. We are less dependent on exports than other countries and therefore what is important is to drive domestic demand. Domestic demand is critical as it comes with job creation and improved sentiments. I would not worry too much about the China impact on stock markets. It may have an impact on liquidity, it may have an impact to some extent on currency but I do not see it impacting the core economy significantly.
Outside of the policy would you say that ome sops for the beleaguered real estate or auto sector are in the pipeline and is really the need of the hour?
I would say the real estate needed a boost because the real estate markets have been weak for a while now and more importantly construction has been abandoned half way or three quarters way and there is very little left over from the perspective of where the builder has to get a little bit more to complete the projects. At the end of the day there is not much that the RBI can do on that. What RBI has to do is to give more comfort to banks, reach out to segments of the economy like NBFCs, housing finance companies, real estate developers which RBI is trying to address by infusing liquidity and by increasing the single party exposure limit from 15 to 20%.

What do you make of the RBI’s announcement today; they are saying that the banks can tag some of the loans to NBFCs for agriculture space as priority sector lending. Why is going to be the impact of a move like this?
What it means is that banks have an obligation to give a certain amount or do a certain amount of priority sector lending. This can be done either by lending money directly or by lending money to NBFCs who in turn can then lend money to those segments of the economy or those segments of the market. What this does is it increases the ability of the NBFCs to get money from banks. It has to be seen as a positive for NBFCs, housing finance companies.