In a chat with ET Now, Keki Mistry, Vice Chairman & CEO, HDFC Ltd., says incremental funding cost is getting lower and the benefit of that lower cost is being passed on to the consumer though at a slower pace. Edited excerpts
ET Now: How do you react to this rate cut decision and what would this rate cut do for the sector which the previous 150 bps cuts have not done so far?
Keki Mistry: The rate cut was expected. All the macro data inspire a lot of confidence. Current account deficit has come down and we are even talking of the possibility of a current account surplus. Fiscal deficit has come down, inflation has come down, the rupee is stable. All the macro indicators are such that one could look at a reduction in interest rates.
The rate cut obviously reduces the incremental cost of funding for people. What you need to understand is that just a reduction by RBI does not necessarily translate into an immediate reduction in the cost of funds of a bank unless and until they start lowering their deposit rates. But clearly the incremental funding cost is getting lower and the benefit of that lower cost is being passed on to the consumer though at a slower pace.
ET Now: Two statements stand out in the policy. One of course is the fact that they have admitted that there are some pressures on the cost push side of inflation which bob its head going forward. Second, they have indicated that the investment climate has been subdued. It has not picked up as per expectation on both those fronts. Do you believe that going forward, RBI would be a bit more cautious or are they indicating that the bias is towards more rate cuts than previously suggested?
Keki Mistry: I think RBI may be a little watchful on this front because there are two-three events which they will need to keep in mind. On the positive side, we have seen good monsoons which therefore would translate into good harvest, leaving more money in the hands of people. This in turn will mean an increase in consumption coupled with the fact that there has also been a lot of government spending in rural areas. It is all very positive but it results in more consumption and the third is the pay hike to the government employees which will also increase consumption. As demand increases, it can put a little bit of pressure on commodity prices. Second, you have to look at the US interest rates also. In December, US is likely to increase rates plus you have the US presidential elections coming up next month. RBI will probably need to keep in mind all these factors going forward.
ET Now: But now with 175 bps rate cut, do you think we can see meaningful changes? You highlighted the fact that going forward, the much anticipated transmission would happen. How would that play out? While banks may cut rates, financing companies such as yourself may also follow suit. Has the demand environment changed? You need borrowers to create the credit demand. Are they coming back to the market?
Keki Mistry: There are two ways to look at demand; one is wholesale demand and the other is retail demand. Retail demand never really slowed down and a little reduction or increase in interest rates does not significantly change demand. Demand is a function of many other factors, not just interest rates. Similarly, when we talk of wholesale demand, that is a pickup in the investment cycle. Companies need money for expansion whether in terms of capex, purchase of capital equipment, purchase of real estate or whatever. It is more a function of demand.
As demand in the economy picks up and demand will pick up as the urban economy is fairly buoyant; the rural economy — coupled with government spending and pay hikes — will see increased rural spending and as rural spending increases, that coupled with the already existing strong urban spending will result in faster capacity utilisation.
I would be very surprised if in the next two, three quarters we do not see a reasonably large pickup in the investment cycle, private sector investments.
ET Now: This rate action and rate stance would mean that the RBI would look at more rate cuts going forward perhaps even do away with that stringent targets and be more flexible. What would this mean for real interest rates, especially interest rates for the depositors?
Keki Mistry: RBI is clearly now looking at growth as much as they are looking at inflation. Clearly the trend is towards plenty of liquidity. Liquidity will result in lower interest rates in the course of time. It has already resulted in lower interest rates and if this kind of liquidity is maintained, we probably will see further reduction in rates.
What could be the outlook going forward? I think it is too early to take a call, there are too many external factors which we need to keep in mind, the impact of higher consumption, the impact of US rate hike, not that these are by itself major events but a combination of three, four events like this, oil prices globally, commodity prices globally. I do believe there may be some scope to look at interest rates reduction but I do not think it is going to be that significant a number.
Credits ET Realty