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May 14, 2013, 03.44 PM IST | Source: CNBC-TV18

Reviving investment, liquidity management key: Pronab Sen

Sen says despite the respite coming in terms of inflation data, liquidity management is the key to Indian economy.

Pronab Sen

Head, Statistics Commission

More about the Expert...

Pronab Sen, former adviser, Planning Commission believes the Wholesale Price Index inflations data for the month of April should be seen with some amount of caution.

"Core inflation falling to 2.8 percent says that demand side is really starting to bite now. We need to be a little cautious about it on because when you are dealing with investments for the future and the creation of new capacities on the whole growth cycle, you don't want to get into a situation where the real interest rate completely explodes on you," he explained.

Though there has been a sharp fall in WPI inflation, liquidity management is the key to Indian economy, added Sen.

"Until savers start putting more money into the bank deposits, we are going to have a liquidity problem. The rising gold import issue too has to be checked," adds Sen in an interview to CNBC-TV18.

Sen believes that as far as anchoring inflation is concerned, the government has done its bit. "I think the job is done. It is now time to start moving towards a more expansionary path, reviving investment and reducing this huge real interest rate that potential investors are facing," adds Sen.

Below is the edited transcript of Sen's interview to CNBC-TV18.

Q: Any guesses, this must be a seminal breakdown in the core inflation number way below 3.5 percent?

A: Yes it has. It means it is probably somewhere around 3.1-3.2 percent but that is not unusual, that is what we should be targeting. The point is it should continue to slide because we would be sending out the wrong signal. So, it is time to start looking at that number very carefully and think if it going too low.

Q: If in case the core inflation has cracked further possibly to the 2.8 percent figure what does it tell you about growth, the fact that core inflation has receded so drastically?

A: What it basically is saying is that demand side is really starting to bite now and this is something that we need to be a little cautious on because at the end of the day when you are dealing with investments for the future and the creation of new capacities on the whole growth cycle, you don't want to get into a situation where the real interest rate completely explodes on you.

And it has already exploded. If one looks at manufacturing, we are now talking about a seven percent real interest rate and that is huge. Anything above 2.5-3 percent is something one needs to get a little cautious on in the slowing economy.

Q: So your point is that the Reserve Bank of India (RBI) needs to cut rates but the government has to buttress this with measures to bring down the CPI through supply side measures, is that your point?

A: That is precisely my point and there has to be a liquidity management. There is also the need for liquidity management. Until the savers start putting more money into the bank deposits, we are going to have a liquidity problem. The rising gold import issue too has to be checked.

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