Excerpts from CNBC-TV18’s exclusive interview with Rajeev Malik:

Q: First, a very straightforward question Cash Reserve Ratio (CRR) hike, Repo rate hike nether or both?

A: CRR hike, there are three different tools or options available for RBI. CRR is one, Repo rate is another and letting the rupee go is the third one. Of the three, for a variety of reasons including the relevance in the current context, I think CRR would be the favourite option.

Repo rate hike, apart from not necessarily being needed, given that growth is already moderating and there is going to be fair amount of political resistance to it, won’t necessarily be exercised. Rupee appreciation is an interesting case, I think policy makers have probably learned something from last years experience and it’s a classic case of not having moved on the exchange rate for quite sometime. Marginal moves will not have much of an impact and the huge outsized appreciation will bring about another political liability. So you don’t really solve a problem by creating another one. And it's important to move away from some very simplistic expatiations being given by quite a few people that rupee appreciation will solve all the inflation related problems. For all practical purposes, last year's moves haven’t helped much on the inflation front to the extent that inflation is actually much higher.

Q: I know you have knocked off any estimates or expectations of a rate cut this year, but what are the chances that this is the start of some kind of increasing spate if you will, do you think this is going to be a stop cap hike in CRR or there’ll be more to come?

A: My own expectation is that the CRR hike would be complemented or if there is any other monetary action would be complemented, by a fairly hawkish commentary. Lot of the debate on whether or not the RBI should move or not just tends to move around in circle that looks an overseas supply side, and therefore it should not do anything. There is hardly any discussion about second round impact etc, all of which has to be quite relevant. And apart from that, there is a pure signaling effect and inflation is far higher that what the RBI’s guidance had been. So I don’t think not doing anything is an option at all.

I wouldn’t rule out further actions - it’s very much going to be a wait and see approach and we’ll have to be quick on our feet for a simple reason that, one doesn’t know of how quickly some of these things are going to turn around. But at the margin I wouldn’t rule out further action.

Q: What was your own reading of this entire inflation fiasco if you will, did it just hit all emerging markets before they could gage what was happening? Do you think that the RBI included will have to up their targets for inflation for the rest of the year?

A: The last thing that RBI should do is to announce a higher inflation target because all the effort over the years that they have put in place, to deal with different things and to anchor inflation expectation would be a total wash out. I think other Central Banks also have to deal with higher inflation partly because there are global factors at play. But there are India specific issues as well -markets expectations for a rate cut, as you recall that was built up. Perhaps it should not have been there has been lot of data updated in a proper manner. I was always shocked, of how very little pressure has been put on some of these data entities that we are a trillion dollar economy and it’s amazing, what shoddy economic data that one has to work with.

Q: Looking at history what’s your assumption about how independent hand the RBI would have with its policy measures this time around, would it just be independent, prudent economic monetary policy or do you think there would be substantial influence from the government in trying to see or trying the Central Bank to be seen as complementing its effort to control inflation?

A:  I think complement is the way to go. RBI itself doesn’t make any bones about the fact that it is not an independent Central Bank. The RBI Governor goes to Delhi to meet the Finance Minister, the Finance Minister doesn’t come to RBI to meet the Governor for example.

But I think it has to be more of a collegial effort. Yes there have been instances when things have been more of a head on to a collegian course, but this time around simply because the government as a whole is on a defensive and RBI itself as well because inflation is far higher, than what it was anticipated. It has to be combination of things and it has to be fiscal measures that are already been put in place; we'll also hear more on those fronts and there has to be some signaling in terms of monetary tightening, which is why I come back to the fact that not doing anything is not any option. 

Q: What’s your own assessment of whether banks lending rates will harden into 2008 calendar or not, because they could do a CRR hike and banks may absorb it on their bottomline but rates may not go up. Do you think that the markets should have a genuine fear of banks lending rates hardening this year?

A: Interesting action is going to be more on the deposit rate side because as and when CRR hike is announced, liquidity tightens in a way comes about. Banks are going to be much more commercial in their thinking at least private sector banks, PSUs would really have to take their cues from not long, I guess. But the issue is going to be from what extent - partly as an effort to preserve margins and they also go ahead and are forced into cutting deposit rates. And I have discussed this earlier that deposits rates are way too high in India and it should be lower.

Q: What quantum of a cut might be power for the course, deposit rate side you think?

A: It remains to be seen, part of it would obviously depend on what RBI lands up doing but 25-50 bps cuts shouldn’t necessarily get ruled out. I think part of the input would also be the kind of guidance RBI gives, and everyone should be prepared for fairly hawkish talks. It’s interesting that RBI is so far that whatever comments that have come out, have been hawkish but haven’t been followed up with any action so far. And for any practical purposes, it seems that any action would be part of policy rather, than ahead of policy and there could be number of reasons for that to really see how the fiscal measures pay out, to not necessarily give the impression that it’s a knee jerk reaction and the Central Bank has just gone ahead.

The other aspect could also be that whatever it does or doesn’t do, it would have a better forum to explain its moves, rather than just having 50-word press statement that talks about whatever action has been taken. So it would appear that lot of the signals coming out of the RBI in the public comments suggest that action is going to be part of the policy itself. 

Q: What’ happening across currency markets right now. There are a couple of large Japanese brokerages that are talking about the dollar strengthening against the yen by the time we are done with the year. Is this going to be a different sort of year you think for the dollar and for the rupee as well?

A: It jolly well could be. Dollar typically tends to bottom out whatever six-eight months ahead of as and when recession setting in the US gets sorted out. So purely in terms of past experiences may not be that much of an outlier. I think the rupee story is somewhat different and I still think markets to a large extent, are just playing or waiting to exhale kind of a story there - that 2008 is not 2009, which is why the simplistic thing that somehow rupee appreciation can take place in a sizeable manner will necessarily play itself out. I think near-term, there is more of a risk of dollar rupee going higher i.e. rupee weakening although RBI will continue to play and make sure that there is not too much of that.

The flows side is going to be totally different; last year the kind of balance of payments of surpluses that were generated because of surge in capital inflows that is last year’s story; I think people need to wake up and realise that this year it’s going to be significantly different. So purely on the capital flows side the support is going to be much less for continued rupee appreciation and that automatically also means it gives more firepower to the RBI to manage the exchange rate wherever it wants it to be.

Q: Where will it hover? You think the lack of flows will take it closer to Rs 41/USD or because it’s easier for the RBI to see closer to Rs 39/ USD because inflation it will probably nudge it that side?

A: Dollar-rupee going from where it is which is hovering around the Rs 40/USD mark to Rs 39/USD; I am actually not sure what it does to inflation which is classic case that small moves don’t have that big of an impact; but this could compound speculative flows coming in simply because people begin to ride the idea that– RBI once again is going to lead the rupee go and they are making the task more difficult.

The other aspect is if they want to go in for a bigger move which the political establishment to the extent that it can bear the consequences of that, might be willing to take a chance with - that’s a separate story. But near-term purely in terms of much less supportive flows dollar-rupee going to Rs 41/USD can’t be ruled out.