ET NowET Now caught up with Keki Mistry, Vice Chairman & CEO, HDFC, for his macroeconomic outlook. Excerpts:
ET Now: People are speculating that US rate hikes will have a bearing on emerging markets' behaviour. What is your view?
Keki Mistry: Let us talk of India first. I said at the beginning of the year that we should be looking at about 75-100 bps reduction in interest rates during the course of the year. Of that, we have already seen 50 bps reduction. So, I continue to believe that there is potential for another 25-50 bps decline in rates.
Inflation will continue to remain subdued. Wholesale inflation has been running negative for some time now. Retail inflation has been sub-5%. My sense is that the RBI will be fairly comfortable with the inflation numbers.
There may be a little concern about monsoons but by and large, monsoons should be reasonably in line as per reports. The impact of unseasonal rains has not turned out to be too negative. So I still believe a 25-50 bps decline in interest rates is in order. Now whether that happens in June or RBI waits for one more month is anyone's guess.
On the global front, the US is going to be very mindful of job creation. The job data which came in last time was fairly good. That has given some of the market players a belief that the Fed may start hiking rates earlier than originally envisaged.
Some people are now talking of a US rate hike coming in September. But my sense is that the Fed will continue to watch the job data for some more time. Unless and until the Fed is fairly convinced that the data is structurally solid, I think they will hold their horses.
What will it do to emerging markets? In the very short to short term, a Fed rate hike may have some marginal impact on the currency or sentiments. On stock markets, there will be no significant impact. So, all in all, I would continue to remain bullish.
Rates in India, in my view, will continue to come down because inflation will remain subdued. We just have to keep watching the data and then take a call on when the Fed hike happens.
But we must remember that the RBI has built up enough cushions, enough of reserves. The level of reserves that RBI has built up is nearly $350 billion. Therefore, I would be extremely surprised if we see any sharp fluctuation in the currency.
ET Now: There is a lot of chorus about how there is a necessity for the rupee to reach its mean level — which is somewhere south of the 64 mark. What is your sense on this?
Keki Mistry: Ultimately, from a medium- to long-term perspective, all currencies have to move in tandem with inflation. If inflation in India is 5% and the inflation in the US is 1%, we could see currency adjustment to the extent of that 4% differential.
My personal view is that 3%-5% depreciation in the rupee over a period of 12 months would be healthy for the economy. It will create competitiveness from an export perspective. It will thereby ensure that the trade balance is fairly well-maintained.
But the RBI now has a potent tool in its hands in the form of its formidable forex reserves. This will help them prevent any sharp fluctuation in the currency. So, in my opinion, any 2013-like sharp fall is out of the question now. That said, we should see a 3%-5% depreciation in the currency over a year.
ET Now: In view of rising oil prices and a likely below-normal monsoon, what is your outlook on inflation? Do you think growth may be impacted?
Keki Mistry: Oil prices are still much lower compared to last year's peak. In that sense, I do not see any serious concern.
But having said that, if China sees a very sharp growth, in that case commodity prices will shoot up owing to rising demand. That could certainly lead to inflationary pressure in India. But as of now, I see no major risk emanating from the oil & commodity front.
As regards monsoon, the RBI may want to wait and watch as the situation unfolds. But there is enough green stock available with the government which they have efficiently used over the last few months to ensure that we do not see any runaway rise in green prices despite the unseasonal rains.
So, I would be going with my earlier belief that we are likely to see a 25-50 bps reduction in interest rates over the course of this calendar year.
ET Now: What is your outlook on the housing space? The sector is beset with a range of problems. Land transactions have pretty much come to a standstill. In view of that, what happens to growth in the housing finance sector?
Keki Mistry: India is a very large country, so there may be problems in Mumbai, but the prospect might be bright elsewhere.
HDFC’s average loan amount in the last financial year for new loans was Rs 23 lakh. Our average loan-to-value ratio is 66%. On a pan-India basis, the average loan amount or the average property price that we would finance would be somewhere in the range of about Rs 35-40 lakh.
There might be problems with big cities, but our growth largely comes from the tier-II, tier-III, tier-IV towns. It has been business and growth as usual in those towns. So, a slowdown in big cities has not affected our overall business much.
ET Now: People are speculating that US rate hikes will have a bearing on emerging markets' behaviour. What is your view?
Keki Mistry: Let us talk of India first. I said at the beginning of the year that we should be looking at about 75-100 bps reduction in interest rates during the course of the year. Of that, we have already seen 50 bps reduction. So, I continue to believe that there is potential for another 25-50 bps decline in rates.
Inflation will continue to remain subdued. Wholesale inflation has been running negative for some time now. Retail inflation has been sub-5%. My sense is that the RBI will be fairly comfortable with the inflation numbers.
There may be a little concern about monsoons but by and large, monsoons should be reasonably in line as per reports. The impact of unseasonal rains has not turned out to be too negative. So I still believe a 25-50 bps decline in interest rates is in order. Now whether that happens in June or RBI waits for one more month is anyone's guess.
On the global front, the US is going to be very mindful of job creation. The job data which came in last time was fairly good. That has given some of the market players a belief that the Fed may start hiking rates earlier than originally envisaged.
Some people are now talking of a US rate hike coming in September. But my sense is that the Fed will continue to watch the job data for some more time. Unless and until the Fed is fairly convinced that the data is structurally solid, I think they will hold their horses.
What will it do to emerging markets? In the very short to short term, a Fed rate hike may have some marginal impact on the currency or sentiments. On stock markets, there will be no significant impact. So, all in all, I would continue to remain bullish.
Rates in India, in my view, will continue to come down because inflation will remain subdued. We just have to keep watching the data and then take a call on when the Fed hike happens.
But we must remember that the RBI has built up enough cushions, enough of reserves. The level of reserves that RBI has built up is nearly $350 billion. Therefore, I would be extremely surprised if we see any sharp fluctuation in the currency.
ET Now: There is a lot of chorus about how there is a necessity for the rupee to reach its mean level — which is somewhere south of the 64 mark. What is your sense on this?
Keki Mistry: Ultimately, from a medium- to long-term perspective, all currencies have to move in tandem with inflation. If inflation in India is 5% and the inflation in the US is 1%, we could see currency adjustment to the extent of that 4% differential.
My personal view is that 3%-5% depreciation in the rupee over a period of 12 months would be healthy for the economy. It will create competitiveness from an export perspective. It will thereby ensure that the trade balance is fairly well-maintained.
But the RBI now has a potent tool in its hands in the form of its formidable forex reserves. This will help them prevent any sharp fluctuation in the currency. So, in my opinion, any 2013-like sharp fall is out of the question now. That said, we should see a 3%-5% depreciation in the currency over a year.
Keki Mistry: Oil prices are still much lower compared to last year's peak. In that sense, I do not see any serious concern.
But having said that, if China sees a very sharp growth, in that case commodity prices will shoot up owing to rising demand. That could certainly lead to inflationary pressure in India. But as of now, I see no major risk emanating from the oil & commodity front.
As regards monsoon, the RBI may want to wait and watch as the situation unfolds. But there is enough green stock available with the government which they have efficiently used over the last few months to ensure that we do not see any runaway rise in green prices despite the unseasonal rains.
So, I would be going with my earlier belief that we are likely to see a 25-50 bps reduction in interest rates over the course of this calendar year.
ET Now: What is your outlook on the housing space? The sector is beset with a range of problems. Land transactions have pretty much come to a standstill. In view of that, what happens to growth in the housing finance sector?
Keki Mistry: India is a very large country, so there may be problems in Mumbai, but the prospect might be bright elsewhere.
HDFC’s average loan amount in the last financial year for new loans was Rs 23 lakh. Our average loan-to-value ratio is 66%. On a pan-India basis, the average loan amount or the average property price that we would finance would be somewhere in the range of about Rs 35-40 lakh.
There might be problems with big cities, but our growth largely comes from the tier-II, tier-III, tier-IV towns. It has been business and growth as usual in those towns. So, a slowdown in big cities has not affected our overall business much.
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