RBI’s easy liquidity policy to bring down interest rates

Do you think interest rates will come down? With interest rates coming down, we are not going to see that impacting either asset quality or investment appetite. The government has done a lot of stuff around inflation management as well. We have been lucky with oil prices coming down and that has helped on inflation. Then a lot of the government action around the food supply chain and trying to come down on speculation, being realistic on minimum support price (MSP), a good monsoon, all of that is helping food inflation. So, we are hopeful that as long as RBI follows an easy liquidity policy that all of this should translate into interest rates coming down.

Vineet Nayyar was here from Tech Mahindra and he told me how the RBI may have missed the bus last year when the oil prices were coming down. At that point, interest rates continued to be high. He said the real effective interest rates for companies like his was over 10 percent. Do you think that was a missed opportunity? There is no much point looking at the past. But the fact is that yes, we had a big disparity between CPI and WPI. The CPI was running at six per cent and WPI was negative. So, the policy was targeting CPI and not WPI.

So, a company has got hurt massively because they were experiencing negative inflation, but interest rates were hugely positive, because we were targeting a real positive return on the CPI. What is happening now is CPI and WPI are aligning and the fact is that CPI is getting impacted by not just monetary policy, by a lot of real world actions, food inflation in particular, the stuff that the government has done around that has helped with food inflation. So, some of this will correct and also the RBI becoming a bit more pragmatic and saying what the real return target needs to be and aligning it a bit more with what global numbers are around.

How far are we? When you speak to your borrowers, how far are we from the private investment cycle picking up because recently, the Centre for Monitoring Indian Economy (CMIE) came up with their data and they showed July to September quarter, both public and private projects had seen a big decline. What is your sense? The capacity utilisation is still running at about 72-73 per cent. Unless that picks up, the investment cycle is not going to pick up. So, we have to watch the capacity utilisation number.

Do we have to worry because in a country where over 80 per cent of investments are led by the private sector and you are saying you are still far away from that private investment cycle to be revived? Is there still cause for concern from an economy standpoint?
Yes, we are a couple of quarters away from the private investment cycle coming through, but the government is trying to push through public expenditure and especially in the infrastructure sector, given the experiments with public-private partnerships (PPP), some of which have worked and not worked, there is a case for government spending kick-starting private sector spending this time around.

The other issue that the CEOs were telling us that apart from the cost of funds being an issue is also the overleveraged balance sheet. How long before the shadow that the non-performing loans (NPA) have cast over banking and financing passes over? I would really argue that it is not the bank’s ability to lend, which is holding back private investment. It is private entrepreneurs’ willingness to go out and invest. So, in a scenario where capacity utilisation is low, growth is picking up slowly and interest rates are high and there is a lot of global uncertainty. We are not finding companies lining to say give us loans and we are not giving loans. That is not the scenario.

So, the risk appetite is still very low... Exactly. So it is not about bank balance sheets. It is about real risk appetite in the real world. Show me the number of projects who want funding and have not got it.But what about the NPAs? How are you dealing with it at
your end? The NPAs are coming primarily from two factors as I have talked about in the past as well. One part is because of the projects which got stuck, whether it is power projects or road projects which got stuck during the implementation.

Two has been the commodity cycle and three has been this phenomena of low growth coupled with high interest rates. So, on all three, we are seeing progress in the right direction. The government has taken a lot of initiatives to try and de-bottleneck some of those projects.

On the steel sector again, the government has taken initiatives to try and help the steel sector and the commodity cycle seems to be turning from a price perspective as well. And, as far as the growth-inflation dynamic is concerned, if the RBI is going to be a bit more balanced, hopefully, we will correct that dynamic. So, all of these have to really play out and that will take its course in terms of bank balance sheets.

• The government’s actions on inflation management, including food supply chain and oil prices, coupled with a good monsoon and the central bank following an easy liquidity policy” is likely to bring interest rates down, according to Axis Bank Chief Shikha Sharma. There was a big disparity between the consumer price index (CPI) and the wholesale price index (WPI) last year and policies were targeting the CPI and companies got hurt in the process. They were experiencing negative inflation but interest rates were positive, Sharma said.
• Now CPI and WPI are aligning and CPI is getting impacted by not just monetary policy, but real world action, she said. Sharma was less enthusiastic about a pick-up in the investment cycle. She said that unless capacity utilisation picks up, she doesn’t see investments reviving. She added that the country was a few quarters away from private sector investment cycle picking up. Excerpts from Shikha Sharma’s interview to Ronojoy Banerjee on CNBC-TV18:

(This article was first published at http://www.firstpost.com. Reprinted with their permission)