80th Annual General Meeting
February 15-16, 2008

Address by Ms Naina Lal Kidwai, Country Head, HSBC Bank

Ladies and gentlemen:

It is never easy to follow right after we have had a session with the Prime Minister himself, an evocative one, where, for those of you who were there, he did suggest that there was still hope for 9% this year.

My own view on this is we are going to see some slow down, we will go from what is very strong growth, in fact, last quarter, as you are well known, at 9.4% to a strong one. Is this something that we are panicking about? No, but is there cause for worry, is there cause at least for us to sit up and take note of the fact that there is a slowing down, I would say yes because, in fact, what we need is not 9% or indeed the projected 8.7% for 2008 but a double digit growth rate in order to ensure that all of India comes through.

The message, as you know, from the statistical office's first estimates released last week and the recent WPI numbers at 8.7% for GDP and the WPI has risen back above 4% having been close to 3% late last year. What this suggests is that there is still specter of inflation and that is what indeed worries the RBI as we know and that is why interest rates have not come down.

As we see, there are several factors which will impact the growth in 2008, first and most important is this impact of interest rate increases, what I am really saying here is empirical work, that our research team does, suggests that in other countries and, therefore, we believe this would be typical in India as well, it takes at least 18 months for the full effect of great changes to be felt. So we will still feel the effect of what happened in early 2007 and therefore high interest regime today will impact us as late as 18 months down the line. It is clearly a cause of concern.

Second is weaker domestic group, in most major developed countries, while we have typically seen lot of statements to the effect that India and China are decoupled, I think there is a growing realization that while decoupling is rather strong, we are not entirely decoupled from the rest of the world. We will see some impact. The third is the effects of rise in the rupee and the impact of higher oil prices and both of these do and will contribute to some slow down as we go forward. Thus, slowdown has been confined largely to consumer durables in terms of what we are seeing in terms of demand and industry therein is beginning to feel this pressure already, but the worry is that weakness spread to investment in time and the latest FICCI survey points to some risks in this direction, although yesterday's production release did show weaker but still strong growth in capital goods. The fact that capital goods still look strong is important because it will suggest that the investment cycle is not getting unduly hurt as of now. We are clearly at the back of a view that the best part is discontinuance in the strong capital goods output despite some softening because in December it was down to 16.6 from a year on year to 24.3, so some slowing down, but it is still at a strong level and it supports future growth. While private consumption forms around 62% of India's GDP, the recent growth, to a greater extent, and before has also been investment driven so, the consumption cycle which is showing some slow down and it is critical element in the GDP is fortunately not being mired in the investment cycle and an investment rate that is, in fact, steadily increasing from around 24% in 2002 to now 35.5% in 2008 which is more than 10% increase over a 6 year period, so quite consistent, is a very strong indicator and while it is still far away from the Chinese rate of investment which is in excess of 40%, the improvement cannot be denied and this 2008 investment rate exceeds the Planning Commission's estimate of 35.1% at an annual investment rate to support 9% growth. So, we are above, the Planning Commission would have hoped to see, marginally above in order to support 9% growth. So positive news there. There has been no change in our own long term India outlook, as in our own research view, we do look at slow down this year but that is more at the sort of 8.5% levels, 8.7% projected by the government and we view the current growth as part of cyclical excess, so a natural correction which may have come anyways. The rupee is clearly appreciating, there is no doubt that it hurts Indian export though the impact varies across different exporting sectors. I say this because not all exports suffer, exported products like finished gem and jewelry benefit from the import gain they get because they import finished, however industries which are entirely export driven and not getting the benefit of cheaper import, textile garments, electronics, do suffer. The key industry for us is the IT sector and given how important the services sector IT and ITES is, within that, what would the impact be of this appreciating rupee for what is a very big driver for India's growth, I think there the messages are little more mixed, so it is not all negative at least not as yet. In time such as this, there will always be a movement towards increased resource utilization, productivity enhancement, a slowdown in salary hikes which have been quite major ,and enhancement in realization rates. So, that is the way the industry will respond and it does need to respond because exports hurt. However, in a funny sort of way, what you get is in term of slowdown globally, actually could kick in higher growth for the sector. So, at what turning point that happens remains to be seen because as industry abroad begins to have to again capture its own productivity in a way that costs are driven down, are we going to be the beneficiary of another cycle of investment that is being really driven by the cost cutting. We were looking at some of the data historically where India's overall service export witnessed a rapid improvement following the US recession in 2000, that is when it went from US $ 17 billion in 2001 to India's service exports at US $ 89 billion by 2007, more than 5 fold increase which started at the time of US recession and it is worth noting that phenomenal increases in the share of these components may well be something that we could be beneficiary of.

There are expectations of repeat but, again, as I said, we don't know quite when that triggers and on interest rate, the fact that prospects of further softening in growth over the year are being noted while there has been no shift in the RBI stand, I certainly believe that we can only come down from here, will probably have to wait a bit to see that. I think the fear of high food prices and a poor monsoon which could trigger India having to import food at a time when food prices have been above the highest, they have ever been, is a concern and once that specter of inflation through the oil price increase which may find its way into the consumer price index over the next few months and from this fear of food price imports and, therefore, inflation therein, this is going to be watched very closely before interest rates actually come down, but come down they must and come down they will. I don't need to tell you that I am firmly aligned in the direction that believes that the rupee will continue to appreciate and our own projections are more like 37.5 by the end of the year.

On that note let me hand back to Amit.

Thank you