Rajan can't bring down your cost of capital: Aswath Damodaran, Stern School of Business.

In a chat with ET Now, Aswath Damodaran, Stern School of Business, says negative real growth in global economies impacts growth in earnings of India Inc.

ET Now: What are your thoughts on the negative interest rate environment with many central banks across the globe now adopting this stance as an input to derive upon valuations across markets?

Aswath Damodaran: The first thing we have to recognise is central banks are more followers than leaders. They do not set trends. They follow rates down. So when we talk about central bank setting rates, the first thing we got to remember is that the only rates central banks actually set are interbank rates, very short-term rates. In the US for instance, the Fed sets the Fed funds rates which is the rate at which banks borrow from a vendor. So those are the rates that central banks can set to below zero. Now here is what makes interest rates or negative interest rates so difficult to grapple with. One on one, you are told that interest rates are what you charge if you lend somebody money. In other words, you are giving up current consumption for future consumption. If you are the lender and as a consequence somebody has got to pay you to give up that. So we are taught to believe that positive interest rates are what you should expect to see in any economy. So when you see negative interest rates, your first reaction is what is going on? I am lending money and I have to pay somebody to lend money. I mean in part of Denmark, it has got to a point where when you borrow money to buy a house, the banks pays you for borrowing money, which is turning logic on its head. It does not seem like what you would expect in an economy.

ET Now: Let us talk about growth as well. One of the key elements is valuation. How are you observing the slow growth environment in China and its impact on global markets by and large?

Aswath Damodaran: The first thing to remember is that to have negative interest rates, you got to have a really bad economy. Good economies do not have negative interest rates. So when you see negative interest rates in the Euro zone and Japan, that really is an indication that expected growth in these areas is not just going to be bad, it is going to be negative. That is the first reality. If you have positive growth, you cannot have negative interest rates. So you are not going to see negative interest rates get into many emerging markets if they are healthy markets. So I think the first thing to recognise is the signal of growth in Europe and Japan that interest rates have become negative and to the extent we are all globally connected that is bad news because Indian companies do sell to European companies and Japanese companies. The fact that there is negative real growth in those economies means that it is going to impact the growth in earnings for Indian companies. I think one of the things we still do, left over from 30 or 40 years ago, is that we think of companies in a country as connected to that country's economy. I do not think that is true anymore. I mean companies in a country are connected to the global economy. So if the global economy is not growing well, then you are going to see that reflected in the earnings growth of the companies in almost every country.

ET Now: In India, the Reserve Bank of India and the government are working together to bring down the cost of capital in the system and improving liquidity. How important is this one factor for Indian companies, particularly, in a slow growth environment?

Aswath Damodaran: I will tell you. I have a great deal of respect for Raghu Rajan. I think he is one of the brightest people in the world and you are lucky to have him as central bank governor. But looking towards a central bank governor to bring down your cost to capital, is like looking to the government. Remember the old days when you used to wait for budget day and that was the day that determined whether businesses in India was going to do well or badly? It is almost like Indian businesses cannot let go of this concept of help coming from above. I do not think help is going to come from above. Raghu Rajan, no matter how much power you think he has, cannot lower the cost to capital for Indian companies because that cost to capital comes from inflation in the Indian country which is as much of function of what the government spends and fiscal deficits as it is the central bank's. It is going to come from real growth in the Indian economy that comes from below, from consumers buying stuff, not from central banks determining things and from the risk in India as country which is and a big chunk of that is political and regulatory risk which central banks do not govern. So I do not see how Raghu Rajan can make the cost to capital for a typical Indian company go from 15 per cent to l1 per cent. That has got to come from real changes in the economy and unfortunately many of those changes have to be political changes rather than changes coming from the central bank.

ET Now: So how do you find Indian markets in terms of valuations of the specific large companies that you may have looked at, the Tata Group, Reliance etc?

Aswath Damodaran: I will give you my perspective on family group companies. I find them very difficult to value in general, partly because there is so much you do not know about these companies. The way I describe it, buying a family group company is like getting married and the day after you get married, you entire set of in-laws move into the bedroom with you. You never get a chance to buy a company, you get a company plus a portfolio of other companies that are part of the group. It reflects India's history, which is that much of the last century business in India has been driven by family group businesses, not even publicly traded companies and now those businesses have gone public. You have huge corporate governance issues with these companies. I am at the mercy of the Ambanis when I invest in a Reliance company, at the mercy of the Tata Group, when I invest in a Tata company. So every investment in a family group company is as much an investment in a company as trusting the family to not take you to the cleaners and that scares me. As an investor I do not want to be that exposed to risks I cannot protect myself against.

ET Now: What are your thoughts on Indian market valuations and what is the outlook on India?

Aswath Damodaran: I think that increasingly countries are interconnected. If there is a correction in the US, you are going to see it ripple through the globe and you are going to see larger impacts in emerging markets and developed markets. So Indian markets are less about the Indian economy than they used to be, they are all connected to the global economy and that is why these negative interest rates in Europe and Japan are problematic because they are sending a signal about future growth that is not good for the global economy. If it is not good for the global economy, it is going to be tough for Indian companies to sustain the earnings growth they need to sustain. The only bright spot for India in this is the sheen has come off a little bit from the China story. The notion that China had everything together and India did not was so deeply entrenched two years ago that companies without even thinking were going to China rather than India. I think we are increasingly seeing the underbelly of the Chinese story which I have always believed existed but companies chose to act like it did not. So I think that the one thing that would worry me across the globe is that if real growth does not pick up, then we are going to see market corrections across the globe, not just in India. There is going to be no safe place to hide when that correction comes but as investors you got to take it in stride, you got to spread your bets and do the best you can. Do not invest money you cannot afford to lose because that is how people get into trouble. I tell people do not invest to get rich, invest to sustain what you have and to grow it, but I think to invest to get rich can be a very dangerous in this market.