Also Read: RBI chief against sovereign bonds; inflation risk persists
In an interview to CNBC-TV18, Gupta adds that higher rates will lead to asset quality stress and views sovereign bonds to be disastrous for the economy. "A credit growth rate estimate of 15 percent is reasonable and the government needs to accelerate equity inflows and discourage debt inflows."
Below is the edited transcript of the interview on CNBC-TV18.
Q: When will the Reserve Bank of India (RBI) actually begin rolling back those liquidity tightening measures?
A: The RBI governor has said the central bank will begin to withdraw some of these measures when it feels there is a return of adequate stability. Though adequate stability is a debatable definition, some amount of depreciation is bound to occur given the difference in the inflation rates of our economy and those of the developed world. I view an orderly depreciation in the rupee as considered stability. However, when that will happen is very hard to guess.
Q: Based on the slowdown in the economy across industry segments - how much more stress do you anticipate on balance sheets and asset quality for banks like SBI?
A: I think there is going to be significant mark-to-market losses for all banks if the current elevated rates continue beyond September. Because in September there will be a mark-to-market on the quarterly earnings and likewise if rates continue to be high, at the short-term, corporates will not be able to borrow disintermediate credit at previous levels, so their costs are going up. It will certainly result in higher rates for the borrowers, for the companies, industry, producers and therefore cause additional stress on asset quality.
Q: The Reserve Bank has estimated credit growth at about 15 percent and growth in deposits at 14 percent for FY14. Do you believe that will be achievable?
A: A 15 percent growth rate could be expected because agriculture and retail would continue to grow at that rate. The differentiator would really be large corporates, mid corporates and small-and-medium enterprises (SME). And how the economy performs will determine very much what the credit growth will be. We hope that growth for the economy will come in at 5.5 percent or so and therefore credit growth for this segment also will come in between 12-15 percent, giving an average of close to 15 percent for the entire banking system.
Q: The Chief Economic Advisor said that the Reserve Bank and the government are on the same page as far as growth and stability are concerned. But one area of difference seems to be on the issue of sovereign bond where the Reserve Bank has made it clear, it is not in favour of sovereign bonds, doesn't believe in the merits of the argument for a sovereign bond at this of time. As the country's largest bank, where do you stand on the issue?
A: It may or may not be cards, but personally I would think it is will be disastrous to have a sovereign bond issue. Any kind of debt-creating inflow is only postponing the problem and giving the economy an additional cost which it can do without.
The real solution lies in seeing how equity inflows, non-debt creating inflows can be accelerated and this requires initiatives on the policy front. I think we should discourage inflows on debt. You see the kind of debt outflows that we have seen recently and that creates a big risk for an economy which needs help —equity flows and foreign direct investment (FDI).
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