After every crisis, people will start pricing risk properly: Vijayan Subramani

Interview with MD and head, treasury and markets, DBS Bank

The US central bank (Federal Reserve) has delayed the interest rate rise, and there is uncertainty on China. Vijayan Subramani, managing director and head, treasury and markets, DBS Bank, India, says India is well placed to handle the volatility and the Reserve Bank of India will cut rates. An interview to Vishal Chhabria:

How do you read the Federal Reserve (Fed)'s decision of delaying the rate increase?

We see that the Fed's delayed decision, along with receding external (event) risks, will pave the way for the Reserve Bank of India (RBI) to cut the repo rate by 25 basis points (bps) later this month. (Repo rate is the rate at which RBI lends money to commercial banks in the event of any shortfall of funds.) The Fed said it 'is monitoring developments abroad' to see if the fundamental outlook changes over time. The focus will be mainly on the Chinese market. Of all the growth generated by the US, Europe, Japan, and Asia, over the past five years, 50 per cent has come from China alone. India seems well-placed to handle a globally volatile scenario.

How do you see events unfolding in China, and its impact on the world and India?

A slowdown in China will have an impact on the rest of the world. It is too early to arrive at a conclusion on the events unfolding in China. The impact will majorly be due to the size of the Chinese economy, its rapid growth, and the model China adopted during the early stages of its rising economy. But, we do not think China is headed for an abrupt slowdown.

The markets have been quite volatile due to uncertainties. Brokerages have also lowered their earnings and Sensex/Nifty targets. How is DBS looking at it?

The market turmoil is nothing to worry about. From India's perspective, the global economy remaining soft is not a bad thing. From a slightly longer-term perspective, lower commodity prices are good for consumption. After every crisis, people will start pricing risk properly. I don't think there is a perfect kind of scenario.

There is going to be a re-assessment of where the money is going to go. And, markets are not going to go away because the economy is weak, as global central banks have become pretty smart in terms of managing these crises. The world is not going to fall apart. But, stability in developed and developing economies is needed. Markets could go down five per cent, and, on the upside, 15 to 20 per cent. I am more optimistic.

The government's focus on increasing investment in infrastructure doesn't seem to reflect in the numbers. How do you see that? When do you expect investments to pick up pace?

At least anecdotally, what you hear from the ground, there is movement. The amount of highways being built today is much more than what were being built 24 months ago. Even in railways, there is an effort being made to clean up. There is no rocket science about this. However, some of it is about good governance. From what I understand, there is a lot of resistance. What we need to do is start increasing productivity. But, beyond a point, you can't, unless there is significant investment in growth. The benefits of those won't come soon.

These are long-term results we have to wait for. It's a tough thing. Prioritising problems is essential. If you don't execute these priorities, why will anyone invest in the country?

In the economy, which sectors are on the edge?

Commodities, especially minerals and metals, and banking continue to be one of those hammered by the stock markets. Those sectors will continue to face stress. But, given the price reductions, it's a great opportunity to invest in them.
 

For the banking sector, do you see NPAs going up from here or have they bottomed out? 

I think they are bottomed out. The banks are looking at it and I think there’s a lot more emphasis on governance, though it is a long way to go. Given my view on the economy and we do have the demographics on our side, even presuming the current infrastructure, India can manage 4.5% to 5.5% GDP growth based on the new measurements. The usual growth will push us a little more. 

In real estate, too, there is debate over where property prices are headed. What’s your view? 

Yes. That is something that has to be resolved in the sense that prices in Bombay, for instance, are more expensive than Dubai, Singapore and many other global cities. But I can’t sort of see a huge correction. The second thing is in terms of cost and quality of maintenance, which again boils down to productivity and having processes in place. While housing prices have gone up, if you had better infrastructure and quality supply coming in, prices would have to come down. I believe, the real estate prices do have to keep coming off. 

On the whole, which are the sectors that can contribute to economic growth? 

Consumers, consumables will continue to do well. I can’t see any of the cyclicals doing well as they will remain under stress for some time. The healthcare and the education sectors continue to do well. 

Given the changes, what kind of impact do you see for the traditional business in banking industry? 

These are interesting as well as challenging times for the banking industry. There is a certain amount of disappointment with traditional banking industry for not expanding. It’s fair to assume that payment banks may not be limited to their account as they manage to reach the roots with their digital platforms. And, their costs are going to be far less. The cost of transaction is coming down with new infrastructure and technology coming in. 

Your take on policy rates? When do you see rates coming down?

The RBI did 75-bp worth of rate cuts in the first half of 2015. The outlook for the second half was clouded by the US central bank's rate direction and the fallout from a weak monsoon. These risks have fallen modestly and provide a window for two more 25-bp rate cuts within this financial year, the first of which we expect this month.

Broadly, there is growth potential in India. So, I continue to remain optimistic, but we need to improve our costs, essential for a sustained low-inflation environment.

What is your view on the rupee? what is the worst case scenario? 

You are asking the wrong guy because I am not very pessimistic. The fact is that financing will be much easier compared to the past. Considering the alternatives, you can’t help but feel optimistic about India.

DBS Group Research expects the rupee to depreciate past 67 by end of this fiscal year. India needs a competitive currency given the focus on “Make In India” policy and weak exports. On a related note, the authorities will also prefer to keep rupee on a relatively weaker footing to compensate for the unit’s strong gains on real terms. The recent bout of yuan weakness further strengthens this case. While the risk-off bouts will weigh on the rupee, we don’t expect any panic reaction akin to the taper tantrums back in 2013 given narrower external balances and higher reserves buffer. 

What is the trend you see, both in equity and debt markets? 

On the debt side, what has happened is people are very happy to pile on. I think India will be one of the few countries where if the macro situation is pretty good, the inflows will remain healthy. Generally, there is a confluence of good things that are happening. On balance, I would be optimistic on India. Obviously the risks remain. But there is no country where the risks do not remain. India is a classic case where you can get over-optimistic very quickly without having the foundations. So some of it is going back to the basics.