Indian economy is slowing. Banking is yet to recover from the bad loans mess. What is your assessment? How do you see economy shaping up?
I don’t think a large economy like India can depend only on banks or on NBFCs to meet all your financing needs. You have to open up the capital markets. And that means the development of corporate bond markets and making them liquid. Today, it is a very high-grade market, we don’t have much trading. India now has the maturity and size, to open up FPI flows into the debt market in a more meaningful manner to get indexation. The government is doing the right thing in being thoughtful about the sovereign bond issuance. It is right to be thoughtful and not rush into it, because you just open yourself up to unwarranted criticism.
How would that move the needle if it is a small amount?
But it is appropriate for them to raise a moderate amount, for example, this year or next fiscal year, do $5-10 billion. It is a very small component of our total debt profile. It takes the pressure off the crowding-out impact, which governments face in growth economies like ours. I would say the development of a well-diversified capital markets, local and foreign institutional debt, perhaps a prudent, well-timed access to external bond benchmarks would be some of the measures the government could consider.
There’s a lot of risk aversion among investors. How do you get the confidence back?
Post-demonetisation, a lot of physical assets moved to financial assets searching for yields. A lot of that money flowed into NBFCs. Some of that was used towards promoter funding. Then, some of these NBFCs, and this is not a blanket observation, invested short-term money into long-term assets. The classic asset-liability mismatch and relatively weak diligence, coupled with being overly exposed to a few sectors, created some accidents. In a sense, it was the characteristic case of easy money chasing high yields. Correcting some of these mistakes will undoubtedly take some time.
There are global trade disputes. India pulled out of RCEP. Though China and the US have cooled down, there’s a bit of an unease.
What are your clients doing in this scenario? And where does India fit in?
Our multinational client base is one of our core competencies. We see this base increasing not only in the traditional US, European and Japanese corridors, but across Asia — Taiwanese, Korean and more recently Chinese corridors. This is a business growing in double digits for us. The most enduring part of the India story is around the domestic market. The second point you made was around the US-China trade conflict, and I believe you will have some kind of an agreement over the next few months. However, this does signal a shift in trade ties in the long run. So, to my mind, this is a great opportunity for India. Now, you could argue that in the short term, perhaps we haven’t capitalised on it as well as countries like Vietnam may have done. But the opportunity is multi-year and truly large one for us to capture.
One of the arguments that investors say is that interest rates are so high. How much scope does the MPC have to cut rates. Will monetary policy action suffice?
Inflation in India has been well controlled but is higher than many developed markets. There is the currency aspect that needs to be taken into consideration. A lot of the emerging markets would be at higher rates than G3 currency, but there is inflationary expectation to think of and there is rupee depreciation which gets built in. Now should the rupee interest rates be lower? You could argue that it can be lower, but would investors put money if inflation is expected at a certain level. I do not find it odd that our interest rates range between 6% and 6.5%, and the US Treasury is at 1.5%. This delta is not really unusual.
The government is talking about privatisation. Would Citi be part of this as an advisor?
We have a very established investment banking practice in India. I would say we are probably the only bank, which has a well-balanced team to play the domestic side, whether it is advisory for equity capital markets or debt capital markets and the international markets. Depending on specifics of each situation, we would want to be advising either the government on the sell side or potentially some of the buyers who may be interested to buy these assets.
How is Citi India geared to serve the capital needs in the domestic market?
We have been in India since 1902. We think of ourselves as truly embedded. In fact, India now has the second-largest employee base after the US. Our business includes the large Indian private sector companies, the public sector financial institutions, the multinational segment, and a very thriving middle market and SME business as well. In some ways, you could argue Citi was really bringing consumer banking to India the way it is understood today. Beyond banking, India is a very huge investment for our service centres, which not only caters to regular banking operations but increasingly serves hi-tech processing for our global platform.