How much can interest rates go down?
I do not see them going down a lot. It won’t be more than 25 basis points. Deposits are not growing at a strong pace and so banks’ elbow room to cut rates is lower.
Is gold playing a spoilsport in holding up banks from cutting interest rates further?
We have been seeing more and more money going into gold. That is a reflection of the fact that Indians are finding more safe investments in gold in an inflationary environment. The propensity of people to buy gold goes up even as we cut interest rates. This is a unique vicious spiral for us. The government needs to improve the attractiveness of financial products in the long term.
Will today’s tinkering of RBI rates help revive the economy?
That is the most important question. The market has been concerned about how much lower GDP can go. Today’s move along with the measures taken by the government over the last six months should some what boost the growth. I love the jugalbandi between the Finance Ministry and the RBI. The fact that the governor was able to push the government to move on reforms, even before the RBI actually made its move was a good idea.
The Governor was stern in his message to India Inc. and the government’s lack of investment is hurting growth. There are no signs of fresh capital spend either. Can today’s policy change that?
It is too early to say. I don’t think investment spend is on hold because of high interest rates alone. Institutional bottlenecks need to be addressed. The fact that today’s statement suggest inflation has peaked gives a positive sentiment boost to the entrepreneur. But it doesn’t change unless we get some structural move on land acquisition and other reforms out of the way.
Neither the governor, nor the market is expecting a serious drop in fiscal deficit. All we are looking for a credible roadmap to go down to 3% in three years. I want to see that fiscal deficit by removing subsidies and not by cutting planned investment expenditure.
Are you convinced wholesale price inflation has peaked?
He did talk of high food and fuel prices and that remains a concern. But our own estimates suggest inflation has peaked. We too see it between 6.5% and 7.5%. The problem is when you cut rates to stimulate growth, you will see imports increasing and consumption increasing, and that in turn will push inflation up again. So, the room to cut rates further is only 50 basis points in the next 12 months.
What are the red flags you picked in the policy statement?
The current account deficit is India’s single biggest issue. It should keep the finance minister and RBI governor awake at night. It is currently funded by short term foreign flows. We nearly need $300 million a day to keep up with this deficit. If the global fund tap is shut, then the rupee will take a blow and could weaken up to 60 rupees to a dollar.