Naina Lal Kidwai, Country Head HSBC India is glad that the RBI's October 29 monetary policy , Governor Raghuram Rajan's second, was on expected lines. "One must congratulate the RBI for its signaling to ensure that it does not spook the market with very sudden changes which the market has to second guess," she told CNBC-TV18 in an interview.
She believes FIIs will be more confident while investing in India going forward. "It is significant that liquidity continues to ease and it is important to recognise that the market needs that liquidity," she says.
On the RBI allowing foreign banks to acquire Indian banks, Kidwai says, unlike market sentiment that foreign banks will gobble up Indian banks, the appetite is not that deep.
"The market also has to act with some caution here and not believe that every bank out there becomes acquisition target because I don't believe every foreign bank is an acquirer and nor is very small or large private bank out there an acquiree," she says.
Below is the edited transcript of Kidwai's interview to CNBC-TV18.
Q: Initially what is your sense is this policy really designed to help growth in some fashion. Life becomes easier for banks and therefore little more liquidity for industry, you think it is a little bit pro-growth?
A: It is atleast at one level no surprise. So, I think one must congratulate the RBI for its signaling to ensure that it does not spook the market with very sudden changes which the market has to second guess and in that, the repo rate was expected to go up, margins standing facility was expected to go down. I think it is significant that liquidity continues to ease and it is important to recognise that the market needs that liquidity.
However, from the corporate stand-point it still does not signal that interest rates to the corporate, as at the rate at which the bank lends to the corporates, goes down while the liquidity easing is clearly helping the repo rate remains the benchmark. That is the challenge how do we bring growth back with interest rates where they are.
We have at Ficci done surveys which have in fact indicated that despite the repo rate reductions of the last couple of years, interest rates have gone up and they have gone up more for the under Rs 500 crore revenue generating companies. What one has, is higher interest rates for the companies that are smaller and it is making them less and less competitive and therefore taking away growth from the system. We will sooner or later have to move away from being so hawkish on inflation and look at growth.
Having said that, inflation also impacts growth and in that we do need to keep inflation in check to bring growth back in the longer-term.
Q: What did you make of that statement on foreign banks being nudged into becoming wholly owned subsidiaries with the incentive that they will be given near national treatment and other phrase he has added which he did not have in Washington including in the opening of the branches. That would that be tempting enough you think?
A: To a large extent, what is being said is no different to what has been said before- foreign banks would be nudged into becoming wholly owned subsidiaries, the terminology of near-national treatment has remained in the refrain so we have to wait for two weeks to see what the near-national treatment means.
But yes, we are opening branches and it all depends where those branches and what structures come with that opening. There were still some tax related issues which needed resolution which I believe would be resolved, but I do think that we also have to juxtapose this against the general environment because there is this impression out there that foreign banks are just going to go in there and gobble up every bank. Believe me, that is not the scenario that is going to pan out.
The appetite of foreign banks to acquire is not necessarily as deep as the market is making out and it is to be viewed in juxtapose freedom to open and expand as well. So, if one can get there with a branch network that he/she likes, are they really going through the pain of an merger and acquisition deal which acquisitions are not easy and then the sought of banks that are being thrown up as possible targets are very specialised, very intense in terms of their regionalisation and scope therein.
The market also has to act with some caution here and not believe that every bank out there becomes acquisition target because I don't believe every foreign bank is an acquirer and nor is very small or large private bank out there an acquiree.
Q: What is your sense about complete normalcy in the FX market? The governor made it very clear that normalcy does not return till oil demand is back in the market. Are you expecting that sometime soon? Do you think the markets are prepared for it?
A: I think the market is prepared. If one looks at some of the measures, he/ she would wonder why we have not taken these measures earlier. We could have had much more of a treasure trove in hand in order to build back in terms of stability and really use this time between now and Quantitative Easing (QE) tapering happening to actually weather the storm.
I think we are certainly in a much better place today. The belief that the market has that we are in a better place is probably even more important and that perception, brings some stability into the market as well. So, yes there is stability here.
The issue around oil demand is clearly there, but we have two other factors which we can still punch away at a higher level. The first one is bringing coal imports down even as we get into making sure that we can get some of the coal we have out of the ground or indeed getting ores and ore exports back up, both of which factors are very much in our hands.
The solution has been staring us in the face and we allowed this whole build up to happen to a point where we found our backs to the wall when the news of QE tapering hit us. I think if we can fight on all these fronts we are already in a better place, but we will be in even better place as QE tapering which looks more like a 2014, maybe mid-year 2014 event leaves us much stronger to weather that storm, because government will in terms of tapering.
Q: You are one of the country's best interfaces with big foreign investors. How do you think they will read this policy? Will they see it as sufficiently benign and sufficiently hawkish? Do you think the money keeps coming because that has really been the fuel for this market?
A: I think the confidence that the offshore market places in our governor; the wide expectation was of a repo rate hike of 25 bps and a MSF cut of 25 bps, the narrowing of the Liquidity Adjustment Facility (LAF) corridor, are all indications that it is a disciplined approach to an end-objective.
The fact that the governor has to maintain a hawkish tone on inflation are all indications that it was actually right out there in terms of what he would do, and the market has not therefore been surprised by this and respects the fact that he does have to work on inflation going forward.
As we move into a scenario where his messaging can be more pro-growth, that will of course take the markets up higher and we have to wait for that, I do believe on inflation we will at least see on food inflation some degree of normalcy returning. Onion prices really drove the food inflation up and I think the fact that we grow onion in concentrations of two states that saw wreckage through the monsoons were added with speculative activity.
