Rate hike may not achieve much: NIPFP

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Monetary steps not needed to curb food inflation: Pawar

Ajay Shah, Senior Fellow, National Institute of Public Finance and Policy (NIPFP), hopes the Reserve Bank does not tinker much with policy at its credit policy meet tomorrow. He feels a rate hike may not achieve much in India. "The Reserve Bank is only a spectator, not a major player in the market. In India, bank credit is very small relative to the economy."

 

Shah says he will watch out for RBI's comments on capital flow controls and remarks on currency trading markets.

 

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

 

Q: What are your expectations from the Reserve Bank of India tomorrow?

 

A: I do not think they will do a whole lot or at least that sort of advice that I would give them.

 

Q: So not even a cash reserve ratio (CRR) or CRR but not a rate signal?

 

A: My perspective on this problem, when you raise rates in India remarkably little happens. The central bank is really not very influential upon the economy. Many of us are making a mistake by transplanting some of the lifestyle and the analysis that we see in advance countries into India. Here we really do not have a bond market; we have a banking system that has many problems. So when the central bank raises the short rate nothing much happens in the economy. There is really no monetary policy transmission.

 

I agree inflation is a problem, but I am skeptical about the extent to which the central bank has their tools. Until we do a lot of work on bond market reform and banking reform, the central bank is much of a spectator. So the tool that seems to matter is the exchange rate, so maybe if you raise rates little more capital will come into the country. If rupee will appreciate maybe that will have an effect on inflation, but I really find it difficult to advice a strong increase in interest rates given how weak the central bank is in terms of doing anything about it.

 

Q: If they do act on rates though, do you think they will do more harm than good or in a fortnight it will go down as a net neutral event?

 

A: To the best of my knowledge, changes in the short term interest rate, which I would like to measure as the 90-day treasury bill rate means almost nothing for the economy. It just does not matter, you raise it, cut it; it just does not matter.