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‘Acche din’ are here for India’s macro: Uday Kotak

In an interview with CNBC-TV18’s Shereen Bhan, Kotak Mahindra Bank vice chairman and MD Uday Kotak explained his oft-quoted take on the Modi electoral campaign’s political catchphrase, acche din aane waale hain (good days will arrive), and what it will take to turn corporate earnings around.

Below is the transcript of Uday Kotak’s interview on CNBC-TV18.

Q: Same time last year, when the government had just been sworn in into office you said: acche din aa gaye. Then we had a conversation a couple of months later and you said: acche din aa rahe hain. A few months later, at the World Economic Forum, when we spoke you said: acche din dheere dheere aayenge. Where do we stand today?

A: I think you have got to define acche din in a particular manner. If you look at the macro — current account, inflation, fiscal deficit — acche din are here because you are significantly better than what you were last year. Yes, oil has helped but all these three factors are very much under control compared to what they were last year.

So, from the point of view of macro economic stability we have made a lot of progress. However when you look at the combination of — at some level India has been a good boy in a bad world. Therefore you look at easy monetary policy by the US, by Japan, by Europe and now China, India has maintained good discipline both on monetary policy and fiscal policy.

When you are doing that, you then say that we are ready to ensure sustainable macro economic conditions even if it means growth comes with a little bit of a lag and comes slower in terms of the trajectory. I am still of the view that India is on a positive growth path but dheere dheere.

Q: What does dheere dheere now mean? Do you believe that may be at the end of the calendar year we are going to see a turnaround that means in H2 we are going to see a real turnaround whether it is corporate earnings, whether it is demand, whether it is consumption?

A: Another important point which is keeping India under a little bit of pressure is excessive leverage of large parts of India Inc. That leverage needs to be recognised either as a problem or…

Q: [Interrupts] Isn’t it recognised as a problem already?

A: Not fully. I don’t think there is a full recognition of what needs to be done with the excess leverage. We need to correct balance sheets of corporate India and their impact on banks and get our act together on fundamental structure of Indian balance sheets.

And that I think is an important point where I think there is a clear role for de-bottlenecking. Some of it has happened but a lot more can happen. However there is some level where recognising reality is as important.

Q: Recognising reality by the promoters or recognising reality by banks?

A: Both. Promoters have to be clear that either they bring in new capital or they run the risk of losing their companies. Banks have to be clear what is the fair value of their debt.

Q: You don’t then see any significant turnaround as far as corporate earnings are concerned at least over the next 6-8 months?

A: My sense is corporate earnings turn around, I am more of the view we will see it towards end of FY16 which is probably closer in Q4.

Of course we have to watch it and we have got to work — for it unlike in the past where a lot of Indian businesses were able to show corporate earnings by quick arbitrage — this is a time for hard work.

Getting the balance sheet right and building a sustainable business. It is not a quick fix, it is not about steroids.

Q: Let us talk about the equity markets, it looks like the Chinese market is on steroids at this point in time and it seems to be coming at the cost of the Indian equity markets. Today we are down about 4 percent for the week as far as our markets are concerned on the Nifty specifically. Do you see this significant volatility that we have now seen over the last few weeks continuing? Do you see the markets correcting even sharply from this point?

A: China looks like a bubble. I am not close enough but the sense I get is when you open a few million retail brokerage accounts a week, it feels and looks like a bubble.

A bubble may have short term joy but creates sustainable pain as we have seen even in the case of Japan or the cause of the global financial crisis in the US.

Therefore, much rather India doesn’t go down the bubble route and to a certain extent between May 2014 and now we have seen excessive exuberance in market. So market is coming to reality with fact that growth will be gradual though sustainable.

Q: What is your growth outlook? The government is still holding on to its projection of 8 percent plus growth for FY16 given where things are and given the fact that numbers do not seem to be adding up. Look at what the core sector tells you and then look at what the headline gross domestic product (GDP) number tells you. In that context what is the kind of growth outlook and also linked to that what do you see in terms of further monetary action from the Reserve Bank of India (RBI)? The Governor has said that he has frontloaded the rate cut. What more can we expect?

A: First of all I am confused between the new GDP and the old GDP but if I go with the new GDP- the March 2015 one, numbers were at about 7.3 percent but the gross value added (GVA) was much lower for the last quarter.

Therefore, if 7.3 is the average for last year, I would be happy if in 2015-16 we did 7.5 plus and that is still a progress but a steady upward, gradual progress but at the same time we must not compromise on current account, fiscal stability and ensure that inflation remains under control.

Q: Do you anticipate one more rate cut in this calendar year or do you think that we are done for now?

A: I may be a contrarian but my view is in calendar 2015 there is a possibility of one more 25 bps.

Q: Between October and December?

A: More towards the end of the year. This is what my belief is and having said that we are going to watch what is happening in the US and other markets.

However, I do not know whether people have observed one very interesting fact which happened between January and now in Indian bond markets; we are talking about rate cut-rate cut.

The repo rate in January was 8 percent. It is 7.25 today. So you have seen 75 bps drop in repo but the 10-year government bond which was 7.76 in January is 8 today, so it has gone up. So there is something which is keeping the long bond fixed interest high and we are going to ask why.

Q: The rupee- and we have heard from the RBI that unless there is unnecessary volatility, the bank won’t intervene. 64-65/USD – where do you see the rupee trading in the short-term?

A: I think about 65/USD is not a bad level and we got to ensure that there is some depreciation of the rupee because Indian inflation is higher than global inflation and it has to reflect in the rupee valuation adjusted for productivity.

Therefore, 3 percent odd or 4 percent odd depreciation of the rupee over a year is not a bad thing. It is good because that keeps us competitive and one of the things which is a reality of easing money policy globally is they keep depreciating their exchange rates.

Look at where the euro has come down to. It is 1.10 or 1.11. It used to be 1.35-1.4 and that is making Europe competitive. Therefore, India’s competitiveness on trade has to be kept in mind and we should not think about rupee only in absolutes but look at 3-4 percent depreciation every year.

Q: One question of rates because the RBI Governor is saying that I have done 75 bps. It is the banking system that needs to start transmitting. We have seen banks move between 15 and 25 bps. What is going on there? Is there room for banks to reduce lending rates significantly, more aggressively?

A: I think the key issue for banks is cost of money and that is linked to deposit rates. When you look at deposit rates, deposit rates are competing with a number of savings rates in the market place including tax-free bonds, including number of schemes like National Savings Scheme, Kisan Savings Scheme. In most of those even today rates are 8.5 to 9. Therefore, how do banks drop their deposit rates and that is the big challenge.

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