Below is the verbatim transcript of the interview. Also watch the accompanying videos.
Q: How exactly would you define interest rate cycle that we live through?
Purwar: We are in a very interesting phase of the economy. The numbers on the inflation side are refusing to respond to the policy stimulus by Reserve Bank of India (RBI). They are much above RBI's comfort zone. For last one year, the hikes on interest rates have been unabated. Even today, the hikes in immediate foreseeable future cannot be ruled out.
Q: As a banker, you are living through the interest rate cycle at this point. What would determine the trajectory of interest rates? Is it just an inflation led issue? Is it about global macros and what that does for the country's inflation and rate trajectory? Is it a whole host of factors that goes into combining the direction that interest rates take over a period of time?
Mallya: No. It's a combination of all factors. Obviously, inflation is one of the important factors that determines in which direction the interest rate moves. As far as the overall indicators are concerned, the global cues are equally important. Ultimately when talks in terms of direction in which interest moves, it is on account of the various mentioned factors.
Q: The RBI leads the entire process with the baton. How important is the RBI in setting this trajectory and ensuring that there is a trickle down effect into the general economy?
Wandesforde: The RBI is fundamentally setting the rates trajectory in India. This is one of the main purposes of central banks across the world. However, it doesn't necessarily work one for one.
What really matters is how the commercial banks respond to what the central bank has done. In the context of rising interest rates from the RBI over the last year or so, it took time for the commercial banks to start passing on the rates to the consumer and companies. It took about six months before the commercial banks were actually ready to start increasing their interest rates.
Certainly, there can be lags which can also depend on the commercial banks owned liquidity position on to what extent they can pass on increases from the central bank. One for one relationship is not necessary. The RBI is fundamental to the rough trajectory at least of interest rates.
Q: The first impact is on lending rates which affects every consumer in the system. What happens when the interest rate cycle moves up as directed by the RBI? How much of a trickle down happens into lending rates? Do they start inching increasingly in tandem with the interest rate cycles set by the RBI or is there some dispersion in movement?
Mallya: As far as the interest rate direction is concerned, one goes by the guidance given by the RBI. The changes take place as per the signal rates. Therefore, the transmission takes place.
Coming to the lending rates, one would have to price the borrowings on account of factors like the liquidity and credit demand available in the system. In case the liquidity is comfortable and the credit demand of pickup is not in pace with the accretion of resources or liquidity, there might not been any increase in the interest rates per se immediately.
There are other host of factors that determine the lending rate, both the base rate as well as margins above the base rate, which takes into account the operational and credit cost.
Q: Inflation is the greatest interlocking for interest rates and the impact on growth. Generally in a rising interest rate scenario, what is the impact that is expected in terms of inflation? Is it a one to one correlation that high interest rates bring down or dampen the inflation trajectory in an economy?
Purwar: If the interest rates go up, certain sectors in the economy get immediately impacted and the demand starts going down. As soon as the interest rates go up, one of the obvious markets, realty industry gets affected as the prices are very closely related.
Similarly, the auto sector also gets immediately impacted because the demand for car loans gets impacted. Rising interest rates are a way to tackle inflation sight. If we see the larger picture, there has to be a very conscious organised effort on the supply side management.
With the current scenario, there is a possibility of 25 basis points interest rates hike coming in. People also say that we might see two-three in the future.
In the present scenario, inflation is continuing to not respond to the various monetary policy measures. In the overall growth side, high interest rates will have adverse impact which has to be carefully evaluated.
Q: how important is the global backdrop in determining what happens to the interest rate trajectory within a particular economy or a particular country?
Wandesforde: It depends on the particular country's economy. In South-East Asia, a lot of smaller pretty open economies are extremely dependent on what happens in key trading partners such as the United States or Europe.
At one end of the spectrum, Hong Kong's exchange rate is formally linked to the US dollar and interest rates are formally linked to the US. At the other end of the spectrum we have India which is a domestically orientated economy, where international developments are not as important as they are in some of these other Asian countries.
Therefore, what happens domestically to the consumers spending and investment is in India's own hands than in the hands of key trading partners. The central bank pays more attention internally, than externally.
Q: Deposit rates are important for banks and even for investors. What kind of flow through does one see in a rising interest rate scenario for deposit rates?
Mallya: As far as the investor is concerned, the primary concern would be to ensure that one has a real interest income in terms of the deposits. When inflation numbers are quite high, one would expect the rates of interest on the deposits to be reasonably above that.
Therefore, the interest rates get aligned on account of a larger inflation especially guided by the cues given by the central bank as per the various rate scenario is concerned.
If we look at it, a one year deposit would give a yield of around 9.5-9.75%, which is marginally higher than the inflation. The overall interest rate scenario is determined on account of number of factors like the inflation numbers. Therefore, the investor would always like to get a positive return.
Q: There is a negative correlation for equity markets, both in terms of where interest rates and inflation goes. Given the situation that India is living through, would fixed deposits remain the best investment asset that someone should look at?
Mallya: There are many factors one needs to look at. As far as fixed deposits with the banks are concerned, they are safe, secure and liquid. Liquidity is a very important thing as far as the investment is concerned.
Therefore, deposits with the banking system could be considered safe, secure and liquid. From that point of view, it is again a good available avenue of investing the surplus money.
Q: A couple of sectors are impacted with this interest rate scenario which is widely documented. One knows the impact that banks face once interest rates start moving up. For autos, there is a very sensitive correlation. Once rates start going up, it is difficult to get the auto and infrastructure growth. Would these remain the most vulnerable pockets once interest rates start going up in the system the way infrastructure and a couple of these consumption sectors perform?
Purwar: Absolutely. Not only these vulnerable sectors which are eluded, even in general the high interest rates are coupled with the environment prevailing in the society or economy. The industrialist and investments are perception driven these days.
Therefore, the investment businesses to that extent are impacted by the current interest rates and the perception on the economic environment. In the long run, it is not very healthy for the system.
The inflation numbers decide the interest rates and the rest would be a positive real interest rate for the investor in the present uncertain environment with high inflation numbers and the expected growth. In today's environment, people sit on cash also called as fixed deposits which is the best form of investment.
Q: You have lived through many rate cycles in your previous avatar with the SBI. For example, the RBI has moved about 10 times its accumulative impact of 450 bps in this year. How long does it take for the economy to recover from this kind of rising interest rate cycle and get back to a normal platform?
Purwar: If the interest rates start going up, the investment decision start getting very adversely impacted. The momentum of growth of the economy starts slackening. Once it starts slackening, it takes couple of years to get back to that momentum.
The economy had an opportunity to graduate from 8-10% growth rate which was feasible. In the global market with the heavy commodity prices, the global financial structure is under huge stress. If the growth rate slackens to 5-7% which could be possible, we will require couple of years to build up the growth rate at 8-9%.
Q: The real-estate developers would point out that if lending rates were to go beyond that 10-11% ratio, it becomes too difficult for an investor to absorb which in turn starts crimping lending rates and loan growth for banks considerably. Would there be a level to keep in mind when talking about these interest rates beyond which it becomes difficult to absorb and when we start seeing a big drop down in growth or volumes?
Mallya: I don't think so. At this point in time, the real-estate developers are paying interest rate ranging from 14-15%. Even at this rate of interest, the projects appear to be viable. One cannot say that a small increase in interest rates of about 50-100 bps would alter the economics or viability, as far as the project is concerned.
There are capital intensive projects like in the infrastructure where interest rate changes to a large extent could alter the viability very substantially. As far as the real-estate is concerned, there would not be a substantial slowdown because of the interest rate hike at this point in time.
If one looks at it, the prices have not come down as far as the real-estate is concerned, but then sales would have gone down because of that. One sees that developers are holding on the price levels and not many sales taking place.
Q: Where do you stand on this calling of a peak in interest rates? Are there any tools to work with? Does it depend on seeing that sustained cool off in inflation? Is it other parameters like growth getting crimped too much which is when you can call, either the peak or start of the cycle in interest rates?
Wandesforde: In India, as in most countries, it is a combination of the two key factors growth and inflation determining interest rate decisions. The importance of these factors has to change over time. Right now, inflation is the predominant concern for the central bank in India.
In the short-term, central bank has made it clear that they have prepared to tolerate some weakening in growth to ensure medium-term sustainability as far as the economy's growth prospects are concerned which is the right approached to be taken.
It should have been taken sometime ago, but at least has been taken right now. We expect wholesale price inflation to remain elevated for a few months around 9-10% level. We don't expect it to start falling until the end of this calendar year.
Therefore, we can see at least another two tranche of 25bps increases in interest rates from the RBI which the commercial banks will pass it on. Unfortunately, that will impact the purchasing power of companies and consumers. Therefore, it will act to slow growth somewhat.
Q: Could you give me a sense of where do you see the interest rate cycle at right now? When could we be looking at a peak?
Mallya: It is a difficult question to answer. At this point in time, as we have seen the recent credit policy announced by the RBI, the inflation continues to be a concern which is about 9% plus. RBI has gone about with a calibrated approach as far as the tightening is concerned.
It would be difficult to say whether we have raised a peak as far as the tightening is concerned. There is a general expectation that there might be a further increase of another 25-50 bps in next couple of months.
As of today, by and large the banks have been charging an interest of about 10-10.5% as far as the housing loans are concerned. In the current scenario where one sees the interest rates gone up substantially, the rates of 10-10.5% are quite reasonable.
Especially, one looks at your investments which are getting a yield of around 9.5%. Overall, we are still in an interest rate cycle which is not very substantially high.
If the inflation numbers come down to a level of around 6-6.5% by March 2012 which has been RBI's indication in the credit policy, one could again look at the interest rate scenario coming down and the customers might get a better deal.
Q: What is your sense of where we are in this cycle? The difference between this cycle and the last one is that the last time we moved very aggressively and very fast. The bounce back both for the economy and individual borrowers happened quite quickly. This time, it has been more calibrated and one doesn't know how long the cool-off will take.
Purwar: We haven't touched the peak. It is very difficult to predict as to how things will move. It looks like 25-50 bps and in the worst scenario 75bps in the next six-nine months cannot be completely ruled out. We are at a point of time interest rates are high and there is definitely an upward pressure on the interest rates.
Therefore, investment decisions by various corporates particularly in the infrastructure and real-estate sector will be impacted. Various industry houses may like to wait for some more time before embarking on very serious and substantial expansion in the industrial sector.
No comments:
Post a Comment