HDFC Ltd.'s Keki Mistry said demand creation, and not rate cuts, will revive private investments after the Reserve Bank of India left policy rates unchanged even as growth has fallen to its lowest in three years.
The “big bang drop” in lending rates seen over the past year has come to an end, Mistry, vice-president and chief executive officer at the mortgage lender, told BloombergQuint in an interaction.
While the Reserve Bank of India may decide to cut the repo rate by a quarter of a percentage point in the next few months, the fall in lending rates has already “bottomed out”, he said.
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The RBI maintained status quo in its policy review to not stoke inflation in its effort to boost growth. There had been calls for another rate cut after the GDP rose at the slowest pace since 2014 in the quarter ended June, largely due to a manufacturing slowdown triggered by demonetisation. Private investments are yet to pick up and credit growth is hovering at multi-decade lows.
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Demand, not rate cuts, will revive growth in private sector investment, Mistry said.
Initially, investment has to be government-led, and as capacity utilisation increases, private investment will also pick up. We are not very far away from seeing a pick-up.Keki Mistry, Vice President & Chief Executive Officer, HDFC
Yet, India is also not in a position where that revival will happen in the next three months, he said.
Here are the edited excerpts of the interview:
The RBI sounded almost certain that there won't be any rate action for the next 12-18 odd months. What's your sense?
I won't put it like that. I would say that everything is going to be data dependent. The RBI will look at the data that emerges, whether it is inflation or commodity prices globally, oil prices, GDP numbers or farm loan waiver and its impact, and then take a call on what to do. I don't think anything is preset or pre-decided for the next 12-18 months. We are close to the bottom of the interest rate cycle. It does not preclude the possibility of a quarter percentage point cut in rate in the next few months.
Will the government have to walk alone without RBI's support? Do you sense growth can revive over the next couple of quarters or do we have to wait for longer?
Rate cuts can never, by themselves, move the investment cycle. People start investing in projects, not because interest rates are low. They invest because they see demand. First, you have to create demand. There is excess capacity in the system. Capacity utilisation is 70-73 percent from what I've read. Until we see that number closer to 80 or beyond 80, you will not see ‘big bang' private sector investment. Initially, the investment has to be government-led and then over a period of time as the capacity utilisation in the system increases, private sector investment will also start taking off. We are not far away in seeing a pick-up in investment, but we are not in the spot that in 2-3 months you will see a big pick-up in investments.
Is it difficult to predict how long this will take?
It's very difficult to time these things. A year ago, people said that we will see investment in 12-18 months. 12 months have passed and we haven't seen a pick-up in investments. So, it will be futile to give a date. But as far as the growth numbers are concerned, I see that in next 2-3 quarters we will see a pick-up in growth. One of the reasons the RBI reduced the growth target is because we had one weak quarter. If you have a year where the target is based on four quarterly numbers, and one of those numbers tend to be low, which is the case, then automatically the target for the whole year gets adjusted.
Having said that, we must bear in mind that the third and fourth quarters of the last year were relatively weak because these were the quarters immediately after demonetisation, which temporarily slowed down growth. That has picked up significantly. Demonetisation is behind us. But when we come to the third and fourth quarters of the current year, we will be comparing these numbers with the previous year's numbers that were low. So, automatically the numbers will start reflecting a much healthier picture than what they have been in the first quarter.
There was a note that RERA will act as a spoiler for the near term. How long will this near term last..if there has been a big impact in the first place?
For anything that is good for the economy or shakes up the system and makes it more robust in the long term, we will have a short-term negative impact. We saw that with demonetisation. My personal view is that demonetisation has brought in huge benefits.
The benefits are in the form of the fact that the income tax department has now access to information about a whole lot of people who in the past were never paying taxes. So the tax department can now get these people on board, which improves the tax-to-GDP ratio. The other benefit of demonetisation has been that people have converted their cash into financial assets, which are now finding theit way into mutual funds, and equity or bond markets. So liquid cash has moved to the financial market, which is benefiting the entire system.
RERA has caused a short-term slowdown because the process of registering projects is taking more time than what probably was envisaged. RERA is a state subject. RERA registration is being carried out at different speeds in various states. But believe me, it is a short-term impact. I don't see growth getting impacted in any significant manner, whether it is for the second, third for the fourth quarter. In my view, the registration process should be streamlined over the next quarter.
Will the RERA impact die down in a hurry? Can you predict the number of the quarters it will take?
It is very difficult to predict. But in the next two-three months, things should come back to normalcy. And it is not as if it has had a major impact on demand. When you get the numbers, you will see for yourselves.
Developers suggest that the key segment which is likely to do well is low-income housing or affordable housing. Is the margin lucrative enough for companies such as HDFC?
I think growth is happening across the economy whether it is in affordable housing or the middle-income segment. But yes, the affordable housing segment affords huge opportunities and that is something which we would like to capitalise on. As far as margins and spreads are concerned, we managed them very well over the last couple of decades. And the spreads will remain in the band they have always been – between 2.2-2.25 percent. I expect the spreads to remain stable. The potential for growth in the low-income segment is enormous.
You are looking at new business opportunities. Can you elaborate?
There are different things we have to look at and everything is on the drawing board. I can't comment specifically on the progress that has taken place on new ventures that we are looking at.
We can look at things like a distressed asset fund – not in steel or cement plant, but specifically related to real estate. Or we can look at an alternate investment structure or we can look at the REIT structure. Health insurance is another option which we can look at. But these are things which will evolve over a period of time.
It's not that we will see three to four businesses being set up in the next three to six months. These things take time. But we have created a lot of value in the existing subsidiaries. These are now ripe and ready for mature businesses. And it's time to create value in terms of creating something for the future.
Watch the full interview here.
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