EXCLUSIVE: RBI should do more rate hikes in initial months, says HSBC India boss Hitendra Dave

Hitendra Dave, CEO of HSBC India, is of the opinion that RBI should get to a repo rate of 5.25-5.5 in the quickest possible time frame, but the veteran banker also points out that this front-loading does not mean that its trajectory is like that.

“I would think they should do a 50-basis point hike in June and another 50-basis point hike in August," says Dave. “If we get to 5.4 per cent repo rate in calendar year 2022 itself, the RBI will acquire a lot of operating flexibility. But communication to the market will have to play a role," he advises.  

In an interaction with Business Today, Dave, who has been a banker for over three decades, throws light on the current economic situation, RBI’s rate hikes, HSBC’s India strategy, and the way ahead. Excerpts from the conversation.

Q: Globally, central bankers are raising interest rates to check inflationary pressures. The US has also decided to wind down its balance sheet. What will be the spillover effect in emerging markets, especially India?

A: India will have a multi-pronged kind of effect because of the rate hikes globally. Some of that will be positive—not because of rate rises—but [because of] why the rates are being hiked. The rates are being hiked, especially in the US, where demand for goods and services has gone through the roof. Employment demand [the need for talent] has increased... [but] people wanting to work has reduced dramatically because of various factors. It has a positive and a negative. On balance, at best, if you want to be optimistic, it will be neutral. Let’s start with the negative.

In a world where interest rates were close to zero and the [US] Fed’s balance sheet was $9 trillion... for anybody who put up a business case… the discounting rate has become zero. Interest rates have the effect of making people estimate the present value of money for future promises. The one negative [now] could be that there is greater scrutiny on some of the future promises. Therefore, some investments that would have flown in earlier because rates were low, and therefore the present value was high, have become slightly more challenging. I’m talking about this new-age start-up kind of economy.

The second [impact] is in the financial markets, especially portfolio flows. Those who were borrowing money, leveraging money, hedge funds, etc.—to invest all around the world—would see their funding costs rise. They need to find more attractive valuations. For instance, we have already seen about $25 billion of equity withdrawals in calendar [year] 2022 itself. Going forward, if the US stock markets fall quite a bit compared to the Indian markets, then the relative attraction also changes. Global investors would find a better opportunity to invest in American stocks. Your competitor now becomes the West because of valuations. Ultimately, money is global.
 
Q: The rupee has reached new all-time lows against the dollar. What is the outlook for the rupee given the global uncertainty and the outflow of dollars from the country?

A: India is doing reasonably well in the context of the global scenario… We also have inflation, but look at our inflation and its causes and sources. Let’s look at its relativity to rates. The US has an inflation rate at 8 per cent against short-term rates of 0.75-1 per cent. Our inflation rate is around 7 per cent (retail inflation was 7.8 per cent in April) against the repo rate of 4.4 per cent. In FY22, India received gross FDI of almost $83 billion, and a bulk of that has come not because interest rates were zero or lower [in other parts of the world], but because of the opportunity to make returns of high teens-plus.

As long as that narrative remains, which is on the back of the explosion in the digital ecosystem, the superb infrastructure created by public authorities to help with payments, collections, lending decisions, KYC decisions, the great work being done by some of our start-ups, and even some of the old-economy companies... the trajectory is very positive.

Q The Reserve Bank of India has been supporting the rupee. Forex reserves are already down from $640 billion to $600 billion because of intervention in the forex market. Do you see the RBI continuing its support?

A. It’s very difficult to know whether the RBI is supporting or intervening. But let’s have the context here. Four years back, the RBI’s forex reserves were about $380 billion. At around this time last year, the forex reserves were almost $686 billion which also included the forward book. The RBI actually bought almost $300 billion dollars over a four-year journey. 

No one can tell what the value of a currency, in this case Rupee vs Dollar would have been if the biggest buyer – in our case RBI -- had not chosen to sterilise all the surplus dollar inflows, and build up its FX reserves. In that situation, the surplus dollars would have landed in the market, would have flown through the system and the buyers would naturally have withdrawn or bought only at progressively lower levels because they would have seen the dollar supply far exceeds the demand.

So, when you soak in all the dollars that are coming in, if they had not bought [them], it is very difficult to imagine where the currency would have traded. Would it have been 70 or 65 or 50 against the US dollar?  

So, what really happened was that the RBI, because it was focussing on reserve accumulation, it also ensured that the currency never actually strengthened based on flows. It is now logical to assume that it [the currency] will not therefore weaken equally, when the outflows happen, because the RBI then matches the demand supply gap.  
My sense is, as long as volatility in the international market remains, equity outflows remain, all currencies versus the dollar will be under pressure, but I think the Indian rupee is likely to be a beacon of strength in an overall weakening environment. I’m not saying it will strengthen, but it will weaken less than the others, and if it will strengthen, it will strengthen faster than the others. 

Q: We have seen inflation because of higher commodity prices globally. Currency depreciation is another element that is making imports expensive. Is there a threat of imported inflation coming through the currency route in the near future?

A: The main commodity channel through which we import inflation is oil, which we all know about. There is very little we can do. The next is fertiliser, where at least the end user is subsidised. It’s the government which absorbs the fertiliser subsidy. All the electronic products that we buy are imported, and all those things become more expensive.

There is bound to be that [inflation]. And that is why there is always going to be a question mark over the approach that the US Fed needs to take in taming its inflation, which is almost entirely domestic, and almost entirely linked to wage growth, labour shortages, and a boom in demand, versus India’s inflation. One of the greatest macro challenges for the country right now is that we know that our economy is just recovering from a pandemic. Businesses are coming back with confidence, consumers are coming back with confidence, and GST revenues are good. How do you ensure that you navigate [safely through] what looks like a 12-18-month journey?

Q: So what is the way, given the kind of headwinds the economy is facing from geopolitical challenges, rising inflation and interest rates? 

A: I would say both monetary and fiscal policies have to work in tandem. The whole country needs to see that both key authorities [the government and the Reserve Bank of India or RBI] are there to ensure that the Indian public is reassured that taming inflation is top of the agenda. It is excellent that there is superb coordination between North Block [where the finance ministry, which decides fiscal policy, is located] and the RBI. For example, the ban on the export of wheat has already resulted in a price correction of 7-8 per cent in the few days since the ban; this also helps in keeping inflation in check. 

In the case of fuel prices, I’m in two minds. There is one school of thought that says that we should cut fuel prices to tame inflation. I think this government clearly believes in pass-through, which then works like in the West—the demand destructs on its own. We have to accept that there is a short-term growth sacrifice. Second, whatever the fisc can absorb, particularly that which affects less advantaged societies, [they should]; high GST collections and the buoyancy in overall tax revenues allow them that luxury right now.

We have to accept that growth will be sacrificed. The best way [for the RBI] would be to do more [hikes] in the initial months or front-load rates. The RBI has already hiked the repo rate by 40 basis points to 4.4 per cent. 

I would think we get to a repo rate of 5.25-5.5 in the quickest possible time frame, but communicate that this front-loading does not mean that its trajectory is like that. I [the RBI] am doing more in the first three or four months… so there is immediate messaging and a dampening effect. I would think they should do a 50-basis point hike in June and another 50-basis point hike in August. People go by what is happening in the longer term. If we get to 5.4 per cent repo rate in calendar year 2022 itself, the RBI will acquire a lot of operating flexibility. But communication to the market will have to play a role. 

Q: In the post-2008 period, we saw near-zero interest rates and an expanding balance sheet in the US, but there was no inflation. Is it different this time?  

A. No policymaker has lived through this. No policymaker has experienced this. And this is the greatest risk and the greatest challenge because we will all have to learn on the job what to do. Therefore, I think it will require a lot of collaborative effort between fiscal authorities, monetary authorities, and corporate ecosystems. I would say this is going to be a very, very difficult and complex journey for everybody. We have lived through growth phases, short-term blips, etc., but this is where it looks like a multi-month journey of inflation way above what we want and yet, at the same time, [we] don’t really want to curb growth entirely. In the US, almost everybody thinks there will be a recession. I don’t think we in India have to even think about it [recession].
 
Q: The IMF, World Bank, S&P and many other agencies have cut their GDP growth forecast for India for 2022-23. The RBI looks to be more conservative as it has cut its forecast from 7.8 per cent to 7.2 per cent. Do you think that the downside risks to GDP growth have risen?

A: If you have a $250-billion trade deficit projected for FY23, that itself shaves off quite a bit of the GDP. This will be the single-largest reason for growth projections to come down. Second, as rates go higher, credit-fuelled consumption will come down. The low mortgage rates of the past also created a demand. So, naturally, all of that will play out a little bit.

Q: What are the big positives you see in the economy?

A: The silver lining in this perfect storm, otherwise, is government tax revenues. Better GST collections could be structural because of the formalisation of the economy, due to stricter compliance and better use of data… I think the second positive, as of now, is wage growth. Wage growth is bad for business, because it is obviously shareholder profit that is going to employees, but from an economic perspective, there are always more employees than shareholders. 

For instance, the IT companies are experiencing 20-35 per cent attrition and also a similar wage growth number. But millions of people are experiencing this wage growth; it can only be good [for the economy] unless it starts becoming a source of inflation itself. The third thing is the PLI schemes. The schemes have been well-structured. I think there is a sense of positivity you feel from young people, from business people, and from investors and foreigners. We are seeing good activity in areas like renewables, payment infrastructure, EVs, real estate, especially commercial real estate, IT, etc. There are large transactions happening in the secondary market, especially M&As.

Q: Indian banking is becoming a big boys’ club. We have half a dozen large PSBs created out of mergers. HDFC group is strengthening its balance sheet through a merger of HDFC Ltd and HDFC Bank. How do you see the emerging landscape?

A: For a country of our size, we need more lenders, not fewer. We are a very large country. We are not [among] the most credit-deprived countries of our scale and size in the world. There is enough for everybody. The regulators have created the right environment with things like IMPS, UPI, consent-based downloading of KYC, account aggregators, credit bureaus, downloading GST returns, downloading EPF returns, etc. It’s a data-rich country. 

And therefore, for banks, the opportunities are immense. It is a fact that five or six banks are grabbing more of those opportunities. There will always be laggards and also winners. But you would also have to say that some of the stronger PSU banks are beginning to make a comeback. I would say till two years ago, they were too defensive. Even on the MSME side, with so much more data [points] like GST and EPFO data, there are ways to provide credit to small entrepreneurs.

Q. The share of foreign banks in India has gone down from 6 per cent before the global financial crisis to 4 per cent currently. The share was as high as 8 per cent in the early 2000s. In the last decade, we have also seen foreign banks downsizing their Indian operations, with some even exiting the country. What, according to you, are the reasons?  
  
A. The metric traditionally used to measure advances and deposit growth might not be the right metric for international banks… For example, if you apply the metric of how many transactions the foreign bank industry has done, you will realise it’s much higher than the 4 per cent that you talk about. If you take things like how much of the global trade that India does, is supported by international banks or how much of the new-age economy companies, how much international banks help them navigate through India, I think if you apply different metrics, you will find very different answers.  

It is a fact that many international banks have chosen to reassess their global retail banking strategy and made the decisions that they have. In the post financial crisis, capital allocation has become a lot more objective and scientific as opposed to emotion based. If you ask me what the most exciting opportunities are for a bank like mine, I don’t need hundreds of branches to access customers. You give me three data points—your account number, your PAN number, your EPF—and I can pre-approve a loan for you and just take an auto debit. Going forward, my sense is that those who have decided to exit have exited. But those who have stayed back—and we are not just saying we [HSBC]—are doubling down. We will actually discover much faster growth rates, possibly in the industry. 

Q: India is one of the three largest contributors to HSBC’s group profits, the other two being Hong Kong and China. What are the big focus areas and the growth drivers in India?

A: We are in the midst of very significant customer acquisition across all segments, whether it is mortgages, credit cards, wealth customers, whether it is customers who want to send their kids abroad to study, whether it is companies which need LCs and guarantees, FEMA, FDI, advisory, regulatory reporting, etc. We are spending money to attract customers. We want to double, triple, or quadruple our customer base across segments. The real opportunity for us is to just acquire customers at a very rapid scale. We are resetting our aspirations and our ambitions in the country. We are a truly global international bank. The high-level strategies—significant expansion in customers on the back of that very meaningful desire to grow our balance sheet—[will help us] become a much more Indian bank. We can be a much more relevant player in society.  

Q. Only two of the 45 foreign banks that operate in India have opted for the subsidiary route. Do you have any such plans? 
  
A. At this juncture, it’s not very clear what the upside is. Our sense is that, whatever our aspiration or ambition for the country, we don’t think that is getting compromised through branch, which essentially means branch expansion. The only constraint, if there is, is that as we look to learn more and more, the cost of meeting the PSL (priority sector lending) obligations increases. And that’s why we need to go down the curve. We have to accept the rule of the law. So now, if you still want to grow, what do you do? We’ll go to the segments that are direct beneficiaries of PSL. So, we’ll find the agri borrowers and MSME borrowers, and that’s through customer acquisition. Every country has some challenge or the other and we just have to accept it as a global bank in particular.  

Also read: RBI MPC outcome on June 8: Will the central bank go for another 40-basis points rate hike?

Also read: RBI MPC: 3-day deliberations begin amid speculations of repo, CRR rate hikes