Interest rates may remain flat till May '10: Deepak Parekh

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The hot topic for many days has been the dollar carry trade. Economists around the world have been apprehensive of how the dollar carry trade is driving up asset classes around the world and whether emerging economies like India need to impose any kind of capital control. In India, the stock market has doubled since March. Experts like HDFC's Chairman Deepak Parekh fear that an asset bubble may be in the making. 

In an interview with CNBC-TV18, Parekh, one of the country's leading bankers, spoke on the dollar carry trade, how long the dollar was expected to remain weak, the impact that would have on asset prices from here, and also gave an outlook on interest rates. 

Here is a verbatim transcript of the exclusive interview with Deepak Parekh on CNBC-TV18. Also watch the accompanying video. 

Q: How long do you expect the dollar to remain weak and what impact would that have on asset prices hereon? 

A: I guess the current situation is that the dollar is weakening. There are no two views. I think everyone around the world is saying that the future course is the dollar will weaken. Which means the rupee should strengthen. It has already strengthened 10% from 50 odd to 46. More money is coming in because who can absorb large investments. Mind you this has happened; the markets have gone ahead before time. 

Hard infrastructure is still not happening otherwise credit growth should not be so low. Credit growth in these six months is the biggest concern I have. It is one of the few six months where the deposit growth is almost twice the credit growth which has never happened. If you look at every six months in the past, we will find very few cases where the credit growth - this time the credit growth is around 10% while the deposit growth is 19% in this April to September. That is not a good sign. 

You talk to the infrastructure companies, Larsen & Toubro or Siemens all these companies they say order books are full, order books are high but lifting is not happening. So we are not building new steel plants fast, we have not started building cements plants. Ultra mega power plants are going very slowly due to bureaucratic reasons; tying up loose ends. Tying up of loose ends takes years not months but years. That will be our downfall if we do not change. 

What is the point of having cheap money accessible to huge amount of foreign funds when you can't build a steel plant? The Tatas are trying to build a steel plant in Orissa for how many years. Three steel plants can come up in that time. We do not have the luxury to wait and someone should realise that this is not the way to go about. 

Q: Are you worried about what the dollar carry trade inflow will mean if we are not able to absorb it in a truly constructive fashion? Exporters are already crying, the appreciating rupee is having other impacts across the economy. If we are not able to absorb it do we need to look at other ways of stemming this inflow? I do not want to use the word capital control but I am suggesting towards that. 

A: Money will go wherever they see reasonable returns. Money will go wherever there is safety. India is a safe country to invest and India will give returns. 

Look at what has happened in Brazil. They put a capital tax when you invest because they had a similar problem. We are more or less at the same level. Huge amount of inflows went into Brazil. Two-three months ago they put a capital tax. The inflow into Brazil has not slowed, because people have surplus money people have to invest. Where do you invest? They are willing to pay the tax and invest. 

If you check the Brazilian inflow has slowed down marginally. That is all. So even if you put capital controls or put caps or something you will also find unless you want to insulate yourself and become a domesticated inward looking economy, you have to face it. 

Q: When you face it what are you facing? 

A: Asset bubbles like real estate, stock market bubble, too much money in futures and exchange, and too much money on derivative transactions. So there are risks involved. People who are doing that have to live with the risks. 

Q: Are you saying that there is very little that we can do to be able to regulate it then? 

A: No it is a pity that we are unable to use the money. We are a capital starved country, what are we talking about. We are a capital starved country. 

Q: If we are able to move growth upto let us say around 7% levels next year do you think some of this money will be efficiently constructively deployed? 

A: I am sure they can be. Just build roads. 

Q: But you are not seeing signs of it as yet? 

A: I do not see signs. Just build roads across the country that will bring economic development. 

Q: When I last spoke to you on the evening of the monetary policy announcement where the Reserve Bank of India did not change rates in any fashion and you expressed minor surprise saying that you thought that they would have made some moves - how do you see the next six months working out in terms of interest rates? 

A: I think the interest rates are stable today. Chances of going down are limited. I would say that chances of marginally increasing are there because of inflationary pressures not because of liquidity issues. There is still enormous liquidity in the system.

So technically rates should not go up and may not even go up in the next six months because you still see around Rs 1 lakh crore every day in reverse repo and that is not the only surplus money banks are having. 

Banks invest in higher SLR than mandatorily required. Banks have money in mutual funds which are temporarily parked in liquid funds. So you have to take a combination of all that to see what is the surplus money in the system. 

So I feel that in the next six months or so, interest rates will more or less remain flat. If at all if they have to be increased they will be marginal, half a percent or so not more. 

Q: Not pressurised a little more by inflation, fueled by all this liquidity supply which is not going into constructive investments on the supply side? 

A: Even then I do not think that they can go up significantly because the demand pick up is still slow. If the credit growth is twice the speed of deposit growth maybe you will see a little larger impact on interest rates. But at the moment I do not see interest rates going up in the first quarter. 

Q: The credit growth is poor only because companies are not investing as fast as they need to in asset building right now? 

A: Not investing. Yes. 

Q: Any reason why - is it because we are just about finishing the process of inventory restocking as people called it? We are still waiting for demand on ground to pick up. Is that what companies are telling you? 

A: I do not think so. Companies are not saying that. Companies are saying that we are not yet getting our act together, getting all permissions to start a large project.

You need five ultra mega power projects. See the progress it has made. Why was it formed? Single clearance, fast tracks, it has not worked. Six months ago, I heard there were three more ultra mega power projects coming up, what has happened, six months have gone. You've forgotten that, where are the auctions, where are the bids? 

Q: Where is the 3G auction for that matter? 

A: Yes, where is the 3G auction. So it is just taking too long. We do not have the luxury to wait.