RBI may reduce rates when it’s more useful: Keki Mistry, Vice-Chairman, HDFC

Keki Mistry, Vice-Chairman of HDFC, expects 50 to 75 basis points (bps) reduction in key policy rates in 2017.
He believes the Reserve Bank of India is more likely to go for a cut when it is useful to spur private sector investment and consumption. In an interview with Shilpy Sinha, Mistry says if India is reducing rates when the US is increasing, it could put Indian rupee under pressure. Edited excerpts:

You were expecting a 50 bps rate cut. Are you surprised by the RBI’s decision?
I was expecting 25 bps cut in interest rate and had said it could also be 50. I think it didn’t happen because maybe RBI had some data, which made them worry about inflation.The second reason is we are in a situation where the US Federal Reserve is most likely to increase interest rate. If India reduces rates when the US is increasing, it could put rupee under pressure. If our currency depreciates more, it could create inflationary pressure in the economy because import costs would go up.

Today, RBI has said the policy stance is accommodative. Do you expect rate cut in the next policy statement?
RBI has proper ammunition to do 50-75 bps rate cut. But they may not want to front-load it. They’d like to do it when it is useful to spur private sector investment and consumption.A 25 or 50 bps rate cut today would not have been too big an incentive to invest in new facilities because there is already excess capacity in the system. We need to increase the consumption in the society, and we need to get capacity utilisation to the higher level before we start seeing investments. RBI may be waiting for a month or two when the rate cut could be more effective.

RBI has lowered the growth forecast by 50 bps. By when do you see growth coming back?
In the short term, lower growth is an obvious thing to happen. If there is a slowdown in demand for some time, it’s because there aren’t enough currency notes in the system. That number will increase over time.

Today, RBI has said that Rs 11.5 lakh crore has come back. Do you expect the pace of deposits to come down?
People with cash have perhaps already deposited their money in banks. So, the number of people who will deposit before December 31 could be much less. We don’t know how much money will come back. It is mere conjecture at this stage. Demonetisation is a great move. It is so unfair that such a small part of our population bears the tax burden for everyone. This isn’t just a politically correct statement, I truly mean it. Our tax-to-GDP ratio is 10.5%. We need to move to 13-14%.

Do you expect banks to cut rates despite no change in key policy rates?
It is a process. There is a mechanism laid and it will take care of rate cuts.A few bps cut may happen.

There were reports that property prices will fall in the secondary market. Do you see any correction?
I don’t believe property prices are going to come down significantly. Plus, cash transactions were restricted to three or four geographies, and not on a pan-India basis.Also, the cash component is more in secondary market transactions than in primary. Historically, when such things happen, demand for property slows down to some extent. We have no numbers to talk on disbursement or collections right now.

Has loans against property (LAP) market taken a hit due to cash crunch?
The way we were appraising LAP is the same way we were appraising housing loans. It is only 5% of our book. We were doing it based on documented income statement.