Keki Mistry, Non-executive Director, HDFC Bank, says “I continue to hold the view that if RBI believes that the monsoon forecast is reasonable, that we are not going to see any abnormal monsoon and therefore not any sharp increase in food prices, somewhere in June, July, RBI could look at the first cut in interest rates.”
The RBI Governor says the inflation is on a downward trajectory. We are hearing what the Fed chair Jerome Powell is saying to the Senate. They are looking at interest rate cuts soon. Now, how do you think the RBI is placed over here in its effort to control inflation and start that cycle of bringing down rates to support growth? How long do you reckon that is going to take?
Keki Mistry: Before we talk of inflation, I would like to mention that I had said in one or two of several earlier interviews in December and January that I expect the growth to be much stronger than what was being forecast. And I think the governor said the right thing, that the growth is very strong. We must give credit to the government for the measures that they have taken to facilitate that growth. And we must give credit to the RBI for the measures that they have taken to make sure that inflation in India has broadly remained under control.
Now, coming to your question on inflation, yes, RBI’s target is 4%. The actual reduction of interest rates, to my mind, is not as critical as it may sound because ultimately interest rates are influenced by the level of liquidity in the system. In the last two or three months, liquidity in India has been tight. We have seen a gradual easing of liquidity in the last two-three weeks. So there has been a little bit of easing of liquidity. Inflation to my mind will depend to a great extent on the outlook on the monsoons.
I continue to hold the view that if RBI believes that the monsoon forecast is reasonable, that we are not going to see any abnormal monsoon and therefore not any sharp increase in food prices, somewhere in June, July, RBI could look at the first cut in interest rates.
It is close to the 8% mark, so exceeding the 7.6% target, and this is exactly what the Governor has told us. But there is a weakness in rural demand. How do you think that is going to affect growth projections that the Governor is speaking about?
Keki Mistry: For a long time, I have been saying that the Indian economy is extremely, extremely strong. I have been saying that growth targets that we had set earlier when we talked of 7%, 7.1% and 7.2%. I said growth will be stronger and I continue to believe that. There are Green shoots in the economy. There are visible signs of some pickup in consumer demand even in the smaller towns and cities. This is a more recent phenomenon.
Having said that, it is true that for a period of time, probably up to December or January, January probably, that the growth in spending in the rural areas has slowed down. I think we have started seeing a bit of a pickup in rural demand in recent times and I expect that pickup to continue.
To be able to anticipate problems and the kind of risk build-up now, the regulatory action is getting much more stringent. It has happened against Paytm Payments Bank also. We are talking about that strictness coming through for JM Financial. We were talking about other companies as well where the RBI is getting stricter. What do you make of it?
Keki Mistry: First of all, I do not want to comment on any specific entity or any specific company. I do not think it is fair or correct without knowing the background of that company. RBI as a regulator has been extremely, extremely proactive and very rightly so. So, if you saw in the month of November, when there was an increase in the amount of unsecured lending in the system, RBI came down and increased the risk weight on these unsecured loans to make them a little more expensive compared to what they were and therefore to marginally slow down or to reduce the risk that they believed was emerging in the banking system.
Now, this was a very proactive step by RBI because we had not seen at that point of time any deterioration in credit quality of these unsecured loans. Even as we speak today, we have not seen any deterioration in credit quality. But to a great extent, that has been done because of the foresight of RBI in intervening at the right time, coming in at the right time, coming in before any problems arose in the system and to sort of slow down the growth. So, as a regulator, RBI has been excellent. They have been absolutely outstanding in what they have been doing. But this does not put reference to any company on which RBI has taken any action.
