RBI should stand up to pressure for easing: CLSA

In an exclusive interview, Malik says “I think the one most important indicator which often gets overlooked is if depositors are getting an adequate return as far as deposit rates are concerned.” Since deposit growth is at a very slow pace, this is certainly not the case.

He compares the Indian economy to a truck which is losing speed because of a gear box problem. “Adding more fuel in terms of rate cuts etc is not really going to fix the gear box,” he explained.

Malik goes on to say that pussyfooting from the RBI is not going to inspire any confidence. He believes the RBI needs to be backed up by action from the government on the fiscal front to overcome the problems in the economy.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.

Q: Which of the two instruments - the repo or the CRR - do you think has a more persuasive case for the RBI to use today?

A: Actually the most persuasive case for RBI is to just stay tight at least until the July meeting. But since the RBI does not act as an independent central bank, a compromise could be more in terms of liquidity injection. It could be a CRR cut or open market operations, how they word it remains to be seen.

Bear in mind, to me India is a bit like a truck that’s losing speed because the gear box is not working properly not because there is no fuel. So adding more fuel in terms of rate cuts etc is not really going to fix the gear box. At the same time, just doing a quarter percentage point on repo will not really change anything. Doing both repo and CRR is far too strong a signal for a country that’s suffering over 10% on consumer price inflation. I understand the arguments people have about core inflation, but I don’t think anybody necessarily uses that in thinking about their inflation expectations at a consumer level.

So ultimately a bit of liquidity action becomes more important. My reason for saying that is not really looking at the Liquidity Adjustment Facility (LAF) deficit, which has actually improved quite significantly, it is really to look at where loan deposit ratio is sitting. So interestingly enough in India we have got pretty high loan deposit ratio and despite that growth is actually at a multi year low, so there is clearly stress in the system.

Q: That concern may actually get exacerbated because of what we are hearing from monsoon trends. No one’s calling it a 2009 like situation yet, but it hasn’t been the best of starts. Are you not in the camp that believes the problem of inflation is behind us?

A: India is the only country at least in Asia where consumer price inflation is running double the pace of real GDP growth. It is absolutely preposterous that market expectations or a lot of the analysts are actually gunning this pressure on RBI to cut rates. India’s problems are not going to be fixed by cutting rates. In fact, cutting rates will prolong the adjustment that India wants. There are far too many moving parts, for example, the impact of monsoon that have not started off in a very wholesome manner, the global backdrop, etc. We do think later in the year oil prices will perk up, so is that a situation where RBI just goes gung-ho in terms of cutting rates?

Don’t forget that we have been at 5% for several months before. Core inflation was stable for several months only to suddenly flare-up because of what global commodity prices did. I think the one most important indicator which often gets overlooked is really are depositors getting an adequate return as far as deposit rates are concerned and that is where consumer inflation expectations and consumer price inflation comes into picture. With such pathetic deposit growth, that that is not necessarily the case. Yes, global flows have also been a negative impact, but inflation in India is more entrenched and the kind of pussyfooting that RBI is doing is not really going to be all that confidence inspiriting.