Ambit Capital expects one 25-50 basis point rate cut in the remaining part of the year, its Chief Executive Officer Saurabh Mukherjea said.
“I don't know what will happen tomorrow. But at least 25 bps, perhaps, even 50 bps is warranted in the next 3-4 months given the state of the economy,” Mukherjea told BloombergQuint in an interview. For now, though the Indian central bank may “hold the fire power” as the fiscal situation gets tighter, he added.
According to Mukherjea, the key to turning around India's flagging economy, which recently slumped the most in three years, lies in repairing its broken banking system and resolving GST related disruptions.
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If we fix the banking sector and continue to nullify GST implementation-led issues, we might assume a bearish outlook towards the economy.Saurabh Mukherjea, CEO, Ambit Capital
Watch the full interview here.
Here are edited excerpts from the interview.
Is the market likely to rejoice in what is seeming like some green shoots of the economy or you wouldn't read into these few numbers like the CV sales and other indicators as that possible green shoot?
The auto sales numbers have been reasonably healthy for a while now. For a couple of years, car sales have been particularly healthy and it's good to see motorcycles sales in reasonably good shape. The CV sales pick-up is a positive. The challenge is that the welter of negative data keeps getting bigger each passing month. Around 8-9 months ago, we [Ambit Capital] were one of the few circumspect voices about the Indian economy. Our circumspection, our concerns about the economy, our increasingly consensus concerns, and to that extent, the stock market is beginning to incorporate, beginning to bake in our concerns about the state of the economy and the banking systems and more generally the corporate confidence context which is fairly feeble in India today.
Where do you turn the corner? Will the market capitalisation-to-GDP stay at the levels that it is? Or do you believe that GDP growth slowdown could lead the markets to overshoot what you believe is a prudent Sensex target.
The overshooting, whether it is in foreign exchange market or equity market seems to be a fact of life. I don't think there is much point in me speculating whether it will go 26,000 or 27,000 on the Sensex. The question you should be asking is how do we turn things around in India? The answer keeps coming back to the banking sector.
We need to find a way to repair the broken banking system. We can't expect to build an economy like ours with a banking system where credit growth crawls along at 2-4 percent year after year.
At the moment the bond market is doing a good job of funding our car sales, washing machine sales, and our home loans. But the bond market is not meant to be the frontline funder of the economy. In the last 12 months, the bond markets lend way more money than banks. Repairing the banking system would be a central issue. The other element which we are hoping to see is teething issues from GST gradually calm down over the next couple of quarters. Especially for small businesses, the teething problems , working capital challenges around GST are fairly meaningful. To be fair to the government and small businesses, that's a function of time. There are IT system issues, there are tax rule issues. Those will settle down over the next two quarters.
If we can fix the banking system and if the GST issues settle down sooner rather than later, by the end of this year we might well be turning around the bearish call on the economy.
What's your call on the banking sector?
Corporate life in India dictates that you find silver linings in the darkest of clouds. The banking system credit quality issues will worsen in the second quarter. I don't have that much doubt that the NPA numbers, not just the large corporate NPAs which we are very familiar with, but also the small and mid-corporates where NPA challenges are mounting. The PSU banks have been on the firing line. PSU banks will continue to get battered on credit quality, again in small and mid-corporate.
We saw in Q1 the housing finance companies' credit quality deteriorated quite meaningfully. I reckon that deterioration in the credit quality in housing finance companies will continue.
I don't think the truck finance is in great shape. The data we are getting suggests that truck finance will continue to weaken. Barring car finance, which I think is the one big bright spot in India, we've got credit quality challenges elsewhere.
Q2 will still be healthy. The numbers for NBFCs will be healthy in the second quarter which we will see, for car finance NBFCs especially. I am not sure about CV finance. For truck finance, there are some issues which are cropping on both utilisation of trucks and freight rates. Both volume data on cars as we can see from auto companies and credit quality numbers will be spanking. The challenge is on the non-retail side, the commercial side. The commercial is around 60 percent of loans outstanding in our country. Uniformly, large, mid and SME credit quality is under pressure quarter after quarter and that will worry any well-wisher of the Indian economy.
What are the leading indicators which you are tracking? Do you think there is need for further stimulus from RBI and the government?
In terms of leading indicators, what is easy to do, and everybody can access the data, is you can see the credit rating agencies' daily rating actions. In the last three months, the rating action has become decidedly less favourable. Suspended ratings, downgrades are increasingly growing which is one of the reasons, I suspect, why the SEBI circular which was to go live today got shelved at the last moment. For stimulus, I don't know where the money comes from. As we saw in the Q1 GDP data, government spending has grown at a frenetic rate, a 25-30 percent growth.
By the end of August, government has eaten through 96 percent of the fiscal deficit. So, unless the exchequer is willing to settle for much bigger Budget deficit, it is difficult to see where the money for the stimulus comes from.
Do you think they will do it?
If they're to pull a rabbit out of the hat, it will be on the disinvestment front. If they decide to disinvest something, which we don't expect, that could give them some extra fiscal fire power. But if they are going to do that, they will do that quickly before the window of opportunity shuts on them. Without doing something which is non-linear and out of the box such as a big disinvestment, it is difficult to see where we get the fiscal fire power to resurrect the fortunes of the economy this year.
What happens to interest rates?
Given the state of the economy, one rate cut is warranted in the next 3-4 months. I don't know what will happen tomorrow. But at least 25 bps, perhaps, even 50 bps is warranted in the next 3-4 months given the state of the economy.
Is it the change in stance?
We were expecting a 25 bps further cut this year. But given how weak the economic climate is, we've increase to 50 bps for this fiscal because the economy has weakened far more sharply in the last three months than we thought could happen. For example, the tax collection data for August is stunningly weak. The corporate tax and income tax is down month-on-month when comparing July against August. The risk pronounces economic weakness which I am sure the RBI will be cognizant of. Rather than 25 bps cuts this year, we are looking at 25-50. If I was the RBI, I could hold the fire power back because my reckoning is that fiscal will get tighter. Government spending growth will become weaker and weaker as we grow in to the second half if the year. I, as RBI, would rather hold the fire power than blow it out early. The economy has softened too quickly in the last 6 months.
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