RBIís decision to hike the repo rate has put interest rates on an upward trajectory. However, Aditya Puri, MD of HDFC Bank, in a conversation with Ira Dugal says that rates should start to ease in the medium term. He adds that restructuring norms in India need to be relooked at and a greater onus needs to be placed on equity-holders. Excerpts:
Is the banking system in a confused state given the recent policy announcement of RBI? And where are we on the interest rate curve right now?
Banks are not in a confused state, but there is unavoidable uncertainty; unavoidable because it is there locally and globally. We have low growth but we also have inflation. We must understand that monetary policy has objectives and limitations. There is too much focus on monetary policy. You canít have a situation where you have easy money with inflation.
In the short-term, say over the next three months, there is an upward bias. Afterwards, rates should ease.
On the exchange rate front, are things seeming more comfortable? What are you hearing from investors you speak to?
Yes, definitely. The general feeling is that CAD this year will stand below-$70 billion. At those levels, itís not very concerning. On the other hand, the FCNR move was a brilliant one. It has done three things. First, it has told those playing around with the currency that there are large inflows likely to come. My own estimate is that more than $15 billion could come in. Second, RBI is clearly stating that the rupee is mis-priced, and it is willing to put its money where its mouth is and say that the forward premiums are wrong. Basically, RBI saidóbring the money in, we will give you an off-market rate which we believe is the correct rate, based on the fundamentals, of the dollar-rupee forward. Third, it brings liquidity into the system and doesnít affect your policy rate.
Will HDFC Bank use either the FCNR window or the Tier 1 capital window and how much will you raise?
We will use both. We canít give you a number but it will be a good amount.
Back to the banking system, it seems like the asset quality problem is just not coming under control, both in terms of restructuring and non performing assets.
The main problem is the restructuring, not the increase in NPAs which normally comes with a slowdown. Let us talk about restructuring.