RBI measures only tactical, not game changers: JP Morgan

However, Sajjid Z Chinoy, Asia Economics, JP Morgan explains that the measures are no game changers but only tactical in nature.

"These are very sensible tactical measures to improve capital flows in the medium-term. I think just because markets are disappointed we shouldn't discount to what these are. Broadening investor base into government securities to include real money investors, reducing frictions into the withhold tax is a good idea. But these are still tactical, they are incremental," he said in an interview to CNBC-TV18.

Blaming the government for inaction, Chinoy adds that domestic policy issues are not holding back investment inflow as current investment slowdown is not due to global factors. He also feels that diesel price hike will improve sentiment materially.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Your snapshot view of what was announced yesterday and how material you think it will be for the money market including the bond market?

A: These are very sensible, tactical measures to improve capital flows in the medium-term. I think just because markets are disappointed, we shouldn't discount to what these are. Broadening investor base into government securities to include real money investors is always a good idea. Reducing frictions into the withhold tax is a good idea.

But, these are still tactical, they are incremental. I do not think they are the game changers that the market was let to believe what happened and what we need to see to fundamentally change the story around the currency and capital flows into the country.

Q: Is the market's verdict yesterday telling the government that it is not going to respond incrementally to these tactical fixes unless some of the core problems are fixed which are macro in nature?

A: The problem is not incremental. The problem with India's currency or with the capital flows in the economy is not because our capital account is not open enough to attract more capital flows. That was never the problem. The problem is much more fundamental.

There is now a question around some of India's macro economic fundamentals - can India grow at more than 8%, will inflation come back down to 5-6% levels that we like it to be, will we return to fiscal discipline etc. I think these are the core issues that have played markets over the last year.

What has happened in the foreign exchange market and the rupee is a symptom of all of these issues. I think what you really need is one or two announcements in the next few weeks or months which will answer these questions definitively. I think the fiscal question is the easiest.

We have benefited from a significant terms of trade advantage over the last month. Crude prices have come off. If you increase diesel prices now to demonstrate credible intent that this year's fiscal consolidation is well on track, I think that is a good starting point to begin to change sentiment.

Q: You think even the foreign exchange market might respond far more to a hike in the price of diesel than to any of the dollar enhancement measures?

A: If you look at the price action yesterday, you almost feel that people are itching to go long on the rupee. I mean there was just the expectation that you could get a sovereign bond of some sort. It is not clear what it would be, what would be its magnitude, how efficacious it would be and the rupee appreciated 1.5%.

There is now a realization that perhaps the currency, for all of India's problems and for the fact that inflation rates are very high, is undervalued and therefore, some mean reversion cannot be ruled out in times to come. That is what yesterday’s action showed. But for that to happen, you need one or two of these fundamental issues to be solved.

If you get two-three things not just ad hoc one measure, I am sure that would have a pretty significant impact on the foreign exchange market, more than the tactical manoeuvers to broaden or open the capital account incrementally. If you get a package over the next few months which is to say this is how we plan to address the fiscal deficit, this is our resolve to return to orthodoxy in central bank to keep inflation low and this is what we are doing to make India a more attractive investment climate, it would have a significant impact.