The industrial output for May has come in at a dismal 5.6% indicating that investment sentiment is down in the dumps now. It has also pointed out to the RBI that, maybe, they should put a pause to the rate hike cycle. Then came the Inflation data that showed a slope down, but still, a price run upwards. So, should the RBI take a breather or not? Economist, Dr Shankar Acharya and the Bank of Baroda Chairman, MD Mallya debate it out as CNBC-TV18’s Latha Venkatesh moderates, on the latest episode of Indianomics.
Q: If you looked at the index of industrial production (IIP) number, the impression you get is that growth is adequately slowed down, but inflation, although is slowing down, is still rising at a slowing pace. What do you think the RBI should do out of this two pieces of data?
Acharya: As you point out that inflation remains high, possibly slowing, while the indices like the index of industrial production are much more clearly showing decline in the momentum of growth in the industrial sector. But the problem there is the volatility of the IIP has been more of a problem in the last two-three years. That certainly makes for a difficult life. Plus, of course, GDP date tend to get revised a lot as the governor himself said in the speech recently and widely quoted. So these are all complicating factors in making a monetary policy decision on a time cycle of every six weeks. My personal view which I have articulated is that we perhaps should not have got into situation where every six weeks, in a sense, the market or people expect the Central Bank to either do A or not A as the case maybe. However, now that we have got it and unless they change the system, it does create its own dilemma.
Q: We still have the system and which way would you lean? A bulk of economists are arguing that 9.4% inflation is still a bad number and the RBI therefore should not let up, should continue hiking but there are some experts, notably like Dr YV Reddy, who have stated that the RBI should wait to see the impact of actions already taken, which way would you lean?
Acharya: I would incline to that view because fair amount of action has been done, the sort of pass through in the system or the transmission process, as it is more technically called, seems to have improved over the years. Lending rates of banks have risen to prime customers in the range of 11-13%, it depends on bank to bank. So it is against the background of slowing industrial production and possibly sharply slowing capital goods production, though the kind of revisions we have seen make one worry about data. I would certainly give a very serious consideration to a pause in the coming cycle.
Q: What is your take, do you think that it is time to pause, not simply call off all rate hikes but maybe pause on July 26?
Mallya: I would say it is a difficult decision to take at this point in time. On one hand, we see the inflation still continues to be high, above 9-9.25% levels, and at the same time, one has seen the pace of growth slightly coming down. One more factor, perhaps at this point in time, which could weigh on the minds of the RBI also is a fact that the full impact of the increase in the diesel, oil prices have not been felt as of now. Therefore going forward, a challenge as far as the control of inflation still continues to be high. Hence, it is a difficult decision, keeping in mind these factors as to what could be done.
Q: Your decision will be what to do if the RBI hikes rates, what is your sense? If that happens will the banking sector once again pass on with a quarter percent in deposits and lending rates?
Mallya: Most of the banks in the recent past have increased their base rate or BPLR rates in line with the last round of increase in the rates made by the RBI. Again, it is a complex factor, wherein the liquidity in the system vis-à-vis the credit demand and the credit growth could play vital role as far as the transmission of these increase in the rates are concerned. As of now, I think most of the banks have a base rate of around 10.25 levels. It has increased significantly, and in case, further increase is there, whether deposit rates will increase or not, it is a difficult call to take. But then, one thing is very clear, we still see the interest rates moving northwards and a very positive bias on increased interest rates.
Q: Dr Acharya let me have your thoughts on inflation. When do you see it peaking off? While the last number has showed some slowing - global commodity prices are really not letting up and there is that threat of a QE3 round the corner.
Acharya: This is an open question in my view. It’s not just the two factors you mentioned that is, what about commodity prices and what about QE3 possibilities; there is also I think the uncertainty with respect to the fiscal outcome. I know that there have been pronouncement from the Finance Ministry that they will be on target on the fiscal deficit for the centre, but I have my doubts and I have had them for sometime now - since February. I think the fact is that the likelihood of the consolidated fiscal deficit of center and states being in the neighborhood of, perhaps, 8% of GDP is there. That makes control of inflation very difficult. Putting the entire burden on the central bank through monetary policy, is in my view, not the right way to do it.
Q: Mr. Mallya - final question to you in terms of growth. Coming back to the question you raised about fresh demand for funds not being very robust. Some people are raising very serious doubts. There are bankers who have said that everything that they are disbursing is last year’s sanctions and sanctions this year have simply not picked up. What is your realistic estimate of growth of sanctions this year?
Mallya: As far as the growth of sanction is concerned, I would squarely put it that last three-four months the sanctions have been substantially down compared to what it was last year. But then it is too early to press the panic button to state that the new projects are not at all being implemented. I think we need to wait for some more time. So, at the moment what one sees is that new projects, especially the Greenfield projects, are not so many as it was in last year. Maybe existing projects are under implementation and that’s it. One has to wait to really see some activity as far as the investment climate is concerned, to really pick up.
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