Q: No doubt that the fundamental situation when it comes to foreign investment has changed but I understand, from your assessment, that maybe it could take us two or three months to get to that point of USD 50 billion in portfolio as you have defined as the potential bottom. You have spoken of domestic money taking the place of foreign funds but that is going to take a long time, right?

A: Our domestic savings are still around 45% which are amongst the highest in the world but we have to make sure that confidence amongst Indian investors remains and that is one of the challenges. The answer to that is to make sure that we are beginning to put in significant liquidity. This Rs 60,000-crore movement of liquidity into the market was a good thing. But over the next one-two months, we need another Rs 1,00,000 crore of liquidity. That again should be a combination of the fact that there is lots of government spending waiting to happen post October 17. Combine that with probably more cuts in CRR Cash Reserve Ratio (CRR) and even potentially statutory liquidity ratio (SLR).

So we need a Rs 1,00,000 crore of additional liquidity in the next month or two coming into the economy. In addition to that, as inflation moderates — oil is at USD 80 per barrel — the time has come for us to think about moderating interest rates. We should be ahead of the curve in terms of dropping interest rates rather than worrying about the actual number of inflation and the base effect of inflation to happen.

We must take that risk a little early in terms of dropping that interest rate curve. If we do that, we can avert this economy from having a hard landing. Today, the biggest opportunity for us as a country is that we are significantly a domestic economy. Our external gross domestic product (GDP) is barely 20% of our total GDP. If we manage the domestic part well, we could make sure that India does not suffer as hard a landing as the rest of the world and moves towards the softer landing. Our story therefore is with much more of a cyclical pain rather than structural pain.

Q: What is your prescription then for CRR and SLR cuts and by how much do you think interest rates need to decline in the immediate term?

A: Between now and March, I would love to see interest rates go down between 100-200 basis points. It should be at the back of the fact that inflation cycle is changing.

Q: Is there anything more that government can do to enhance liquidity? You spoke of some of that money coming in, in terms of government spending; you have mentioned the kind of prescription you see for rate cuts but any out-of-the-box ideas? I know that some people have been now lobbying for all kinds of ECBs curbs to go away. Latha Venkatesh, Banking Editor of CNBC-TV18, was asking whether we should ease up FII debt limits, remove NRI deposit limit just to be able to attract more money and ease up the liquidity situation. Any ideas?

A: At this point of time, every overseas Indian is scared about his money with any global financial institution. At a time like this, when Indian financial institutions and banks in particular are in such good shape in general, we can actually attract an enormous amount of overseas Indians’ money into India. He is looking for safety. That is a very big opportunity and to a certain extent, the current rules on FCNR (foreign currency non-resident) deposits should be liberalised in terms of the kind of spread over Libor (London inter-bank offered rate), which banks can pay and NRIs from around the world are looking for a safe haven like India.

We should take this as one huge opportunity to track significant NRI flows into our economy on the basis that we are a much sounder economy than probably any other economy in the world at this point.

Q: I am assuming that you are also in favour of removing all ECB limits.

A: We should make sure that as long as it is of a reasonably long-term nature, we should encourage it (the removal of ECB limits). But my view is that when global financial institutions are in their own turmoil, I am not sure how much they are in a position to lend. Therefore (we should) go to the direct source of the money — which is the depositor and the saver himself — and open the doors for him to come and put money into Indian institutions and India and get the flows.

Q: One of our reporters was putting this out saying that there seems to be some sense of redemption pressures now on mutual funds. That was the one last leg of this market that was standing up and it has been a worry for a while saying what happens when retail investors start wanting their money back. What is your assessment of how we are looking on the mutual fund-redemption side?

A: No. The reason why the mutual fund debt side face pressure you saw was the sharp increase in interest rates in a short span. Therefore, people who put money into short-term funds saw the advantage of arbitrage out and getting into overnight because of the differential in interest rates. If liquidity is brought into the system and you see these exorbitant interest rates come back to normalcy, you will see it help moderating this anxiety about mutual funds. Therefore, a calibrated move in interest rates is acceptable but if there is a sharp move in interest rates, you will see this kind of reaction for mutual funds.

My answer is: flood liquidity and create expectations that interest rates will move down as inflation moderates and that will begin to create some sort of stability with the debt mutual fund industry. That has to be combined with the fact that we need — as between the current policy makers — to find a way that should debt mutual funds need access to liquidity, we must have a way by which that is available to them to meet interim redemption pressures. That is the key to maintaining confidence.

Q: You spoke of your estimate of economic growth, you said 6% to 6.5% early next year and that’s a rather dismal number from what even the finance ministry is standing by which is close to 8%. What is it that companies are telling you when it comes to that investment pipeline, do they have the confidence to go out there and continue to build new projects?

A: You have seen an interesting cycle where a lot of investment programmes have already stated and are past the mid-point. Therefore those investments will continue to get completed. Any company today is pausing before it starts on a new investment plan and so we will see the completion of the existing investments that are already in the pipeline happening, but companies will be cautious making new investments. There may be some pause which may be between six to 12 months and when I am saying 6-6.5%, this could be a pretty important point for soft landing. If we manage that soft landing, we could go back to the 7%-mark in a matter of a few quarters.

The important point is let’s not have a thud, let’s manage it. We have a unique opportunity because unlike the rest of Asia, which has significant export dependence on Europe and the US, India doesn’t have the level of dependence even vis-à-vis a China. We must make sure that the domestic economy, domestic consumption and the core investment story is protected and the answer to that is that we are coming to the bottom of the barrel in a way of USD 90 billion FII stock. We need to make sure that domestic liquidity is put in place and confidence is continuing to remain in the strength of our own economy, which is to an extent linked but there is a very strong local element to our economy as well.

Q: You mentioned the word confidence, which is a much-abused word now. How do you bring back confidence in a global and local situation where institutions on Wall Street are getting wiped out by the minute, central banks have to now comment on things like the commercial-paper market? Yesterday, there was talk of the Fed coming to the financial-paper market to help create liquidity in that system; banks across the world are facing deep trouble. You are talking about confidence, about creating a domestic economy. How are we going to do that in this volatile environment?

A: You are comparing two different animals. The fact of the matter is most of the institutions in the US were excessively leveraged; they had leveraged levels of 30 to 40 times. Indian institutions and banks in particular are nowhere near that levels of leverage, Indian banks have significantly higher capital and much lower leverage than any of these developed markets and that is the important point. The level of risk that financial institutions carry has a direct correlation to the levels of leverage and India is low on the leverage side and that is a big plus vis-à-vis global institutions. So the global institutions must face the pain — if a global institution has Rs 3 of capital and Rs 97 of debt and is investing Rs 100 in risky assets, it takes Rs 4 to go.

Q: You have spoken about the need for domestic money to take the place of foreign fund especially as you think it will take three-five years for this structural problem in the global economy to go away. How is that domestic money going to make up the gap that foreign funds will create, once they go down to like USD 50 billion of an FII portfolio?

A: We must get much more focussed first of all. There is a focus on foreign direct investment. Portfolio flows, by their very nature, have an element of leverage and momentum in it and those are not necessary and sustainable. While we not depend on portfolio flows we must assume that if we do the right things, the portfolio flows will follow. I would rather focus on the fact that we have got a 35% domestic savings rate and we have got the banking industry which is in great shape. We have also got our life-insurance industry, which is building up very well, we have got pension funds as another big opportunity and if our savings properly are canalised to the right levels of investment, right flows from the global markets will come when those things gets better. Simultaneously, (we must) focus on quality FDI coming into India and finally we have to do what is right for our country. We cannot be at the mercy of what happens in one square mile of Wall Street.

Q: Any new thoughts on how can we get those savings channeled into the market?

A: If interest rates come down, you will see a situation where a saver will want to become an investor and the key to it is that quality companies should continue to perform steadily and liquidity interest rates are the key and manage a soft landing for the Indian economy and we have a very big opportunity for a soft landing.