Likely to see 100 bps rise in key rates this yr: Uday Kotak
On the sideline of the WEF's Annual Meeting at Davos, Uday Kotak, VC & MD of Kotak Mahindra Bank and Ajit Gulabchand, Chairman of HCC, in an interview with CNBC-TV18's Menaka Doshi gave their views on how they see the India story panning out.
Q: We have a strong Indian contingent here of 120 leaders and several ministers that are expected to join us between today and tomorrow. I am curious to know, what is the 'India story' that we are selling because back home, the newspaper headlines are full of gloom?
Gulabchand: When we met here last year in Davos, there was a lot of gloom. It was lifting, the crisis was past but the economic crisis was still upon us. It has lifted further even though there is mixed news. The world is not celebrating but heaving a sigh of relief. Davos is looking at itself in that context.
Now when Indians decided to come here and make the India inclusive show, it was decided a while back before the goings on in India. We have actually seen that precipitous fall in the sentiment and cynicism creeping in only in the last four months. As it happens at the time of boom, all the good things completely put a blanket over all the bad things that are happening.
All this gloom spreading and the scams and all the cynicism also covers up for a lot of good that is happening. We are on course to be part of the world inspite of the happenings around the world and happenings in India.
Q: What do you make of the India we are attempting to sell here in Davos in a year - when the US seems to be doing alright and is back on the recovery path? We don't have the big sovereign debt crisis hanging over our heads, so other parts of the world are also looking attractive?
Kotak: Indian business at times, tends to be exuberant or pretty despondent. My view is that the India story will have its cyclical ups and downs on the way but the trendline is still pretty strong. If you go back to the history of the India story through the 90s and early 2000s, when I used to come to Davos, it was primarily a bottom-up company story.
The top-down India story through the 90s and early 2000s was not looking as strong. Between 2002-03 and 2008-09, the India story, in addition to the bottom-up story became a strong top-down story as well. What we have to focus on now is while the bottom-up individual corporate India story will continue to keep its momentum, how do we ensure that the top-down doesn't drop from where we are.
Q: How do we ensure that?
Kotak: It is not an easy one and requires a significant focus on governance issues, on efficiency and productivity of the economy. Your current account is rising which shows that Indian exports are less competitive than the need for imports. We have got to get our basics focused on as a macro theme and corporate India can only do this much. It has to be a combination of broader governance and society combined with actions of corporate India for sustainable growth.
Q: What do you make of the recent rate hikes that we have had? Most people expected 25 bps but there is a sense that the RBI will continue on its tightening path over the course of the next several months?
Kotak: India has got the positives of growth and with it comes inflation. The rest of the world would die for India's growth even if it meant inflation coming in. Therefore, we should not get too worried about that. What we have to ensure is that inflation does not become structural and it doesn't become more deep-rooted. From that point of view, rate hikes are something which is appropriate. We are moving towards a scenario where we will have positive real interest rates.
Q: Hasn't it already become rather sticky because we have had several tightening moves and we now in fact have the government and the RBI moving up their inflation target instead of moving it down to 7%?
Kotak: From that point of view, we are still not in the real interest rate positive zone. Therefore, we need to go further and which we will see through 2011. My view is, we will see another approximately 100 bps increase in repo and reverse repo rates through 2011 from here.