Demand uptick needed for breakthrough in business confidence: Amandeep Chopra, UTI MF

In a chat with Mythili Bhusnurmath of ET Now, Amandeep Chopra, Group President & Head - Fixed Income, UTI MF, says 2-3 more quarters needed before given the current uptick in demand cycle and the kind of growth that we are expecting in GDP, we will start seeing some excess capacity getting squeezed out. Edited excerpts

ET Now: Banks need to start lending to industry and more importantly the industry needs to start demanding loans for expansion which would perhaps trigger a turnaround there. Activity seems to be picking up but there is also a debt scare in the market where a lot of these companies are highly leveraged. So some of them have reduced their debt positions and to start leveraging again will perhaps take another cycle. How do you think a breakthrough in business confidence will take place?

Amandeep Chopra: We need to be a bit patient with this turnaround as it has already been pointed out that the industry is currently sitting on surplus capacity because of the capex which was undertaken in the period between 2011 and 2013. Until demand really catches up to the extent that you know you have some degree of excess capacity utilisation from current levels, it is going to be difficult to imagine why would the corporate sector really go ahead with an investment cycle. So I think we just need to be a little bit more patient for the demand to catch up. If our view, we could see another two-to-three more quarters before given the current uptick in demand cycle and the kind of growth that we are expecting in the GDP, we will actually start seeing some excess capacity getting squeezed out.

Secondly, we also need to understand that a good part of this capacity build-up which was undertaken was also to some extent dependent on an export driven demand which has been fairly weak. So you need to see to some extent, some degree of demand coming from the global growth as well. As long as that remains very poor, you will see very little propensity of the domestic corporate sector to really start investing. So rates clearly will help. That will bring down or at least break even the threshold IRR which the corporate sector needs before they really start planning out any new capex but that alone will not suffice in my view. I think we really need to have some degree of demand uptick first.

Mythili Bhusnurmath: The problem with macroeconomics is that you know one can never take a view in a silo. So while it is true that if lending rates were to come down, it will make it more attractive for corporates to invest, the fact is that if lending rates come down, it will happen only if deposit rates come down. If deposit rates come down, you are going to see that deposit growth -- which was perhaps at a 50-year low last year -- will increase much more. And how will banks lend? So in macroeconomics terms, there is always a plus and a minus. So where does the RBI draw the line? Lower interest rates help borrowers but lower interest hurts savers and without savings you are not going to get investment, you are not going to get lending, so where does one draw-- how does one balance these two?

Amandeep Chopra: I think in our view, RBI has already drawn the line. I think the last rate cut that you saw was possibly, the last of the rate cuts that we will see. I think going ahead, RBI is going to focus more on transmission and that it is through a slew of new tools and policies that it might have actually implemented now. Clearly, the cut in small savings rate is one of them. Going ahead, I think the monetary easing which they are trying to ensure where you will have a neutral liquidity in the system will to some extent help in this transmission. You know it is ironical that if you look at 150 bps of rate cuts over the last 18 months, you have not only had the deposit rate slowing down meaningfully, we have also had credit not picking up at all. So clearly further rate cuts are not going to lead to any further increase in credit off take and at the same time also sort of keep the deposit growth rate stable.

Mythili Bhusnurmath: Absolutely. The solutions are not easy. You spoke about how our export demand has not been going up and how we will have to look towards domestic demand. But ironically, though we like to blame the lack of export demand to global slowdown, the fact is many of our competitor nations, Bangladesh, Indonesia, Vietnam have actually seen exports grow. So is it because of global demand not being there or is it because we are failing to do something, essentially allowing a weakening of the rupee or allowing the rupee to reflect its fundamentals so that whatever contribution could come because of competitiveness through the exchange rate, even that opportunity we are losing. Does the fault lie not the in the stars but within ourselves?

Amandeep Chopra: I think clearly we do have some weaknesses in terms of our export basket. So Bangladesh and Vietnam have been clearly been growing their exports but that is again not only supported by currency depreciation but also by the kind of product basket that they really focus on. We are focussed a lot more on engineering goods on certain processed commodities and so on which clearly are dependent on the global macro improving which currently clearly does not seem to be the case. Secondly, I think if you really look at uptick in domestic demand, that is our only hope over the next one to two years because no one is really optimistic on global growth. So clearly the surplus capacity and the 71 per cent capacity utilisation that we keep speaking about has to be met through domestic demand. Now can we have excess growth in domestic demand from the kind of numbers that we are seeing at present? I think that is going to be very, very difficult.

Mythili Bhusnurmath: Professionalism in public sector banks can really happen only if the government were to reduce its stake and is that equally true in case of UTI as well?

Amandeep Chopra: Well, that is a tough question. I think the consensus clearly seems to be towards reduction in equity holding, done in a way to bring in a different degree of board construct, a different degree of management as well. So we have seen instances where you have actually had both models performing very well. So it is difficult to say that just one model of lower government ownership will actually make it a lot more efficient. I think if you have the right policies and incentive structure built into the organisation, you can actually have without too much of interference, a very professionally run government owned banks as well.