Stating that he is in the camp of the Reserve Bank of India, Hitendra Dave, CEO, HSBC India says that as food inflation affects everyone, it won’t be appropriate to carve it out while determining inflation. In an exclusive conversation with Moneycontrol, when asked about the likely impact of loosening of interest rate cycle, Dave said what’s more important to watch is the terminal rate of interest, commentary from the FOMC and allied data points, rather than the actual quantum of rate cut itself. Also, Dave believes that while Indian businesses have easy access to foreign capital and have capital account convertibility in practice. Edited excerpts:
There is the Fed meeting this week and 20 central banks meetings too. Many of them are likely to cut interest rates. What do you see as the overall impact of the end of the tightening cycle?
While rate cuts are widely expected, the relevant issue is where is the terminal rate. On that subject, there has been a significant amount of discussions. There were earlier talks of (FOMC) landing at 3 percent (benchmark) rate and more bullish calls at below 3 percent. Now, people are talking about a rate cut on Wednesday and thereafter slowing down on the back of a more sticker than expected inflation. Also expectation is that the Trump Presidency is likely to be growth oriented, which could have implications on inflation. The cuts that have happened so far is to largely take it from extreme restrictive levels of 5.25–5.5 percent to maybe 4.25–4.5 percent. The issue is not about the (rate) cut but the language, forecast and subsequent data that they will release, which will suggest the terminal rate or expectation of pace of easing next year and the quantum.
There's much speculation on what RBI might do in February. What are your expectations?
I'm more in the camp of the central bank. If you carve out this part (food inflation), then you're not really managing the inflation. Inflation is something, which affects every citizen of the country and if he/she is experiencing it through (prices of) potatoes, tomatoes, onions and edible oil increase, that is inflation. Growth was so far strong and in-line with expectations. This allowed the RBI to exclusively focus on managing inflation. The recent GDP growth rate is something, which even a pessimist would not have expected. But, monetary policy works with a lag and I really don’t see the need to cut rates yet.
Do you expect any intra-policy rate cuts?
It may spook the market because many times markets believe the RBI knows much more than they do. More focus will be given on growth and reflect that with the inflation trends of December and January 2025. At this juncture, the RBI may continue to maintain the stance.
On the 5.4 percent GDP growth data, why did it come down so much and what can be done to turn this around?
Industry/ manufacturing had a very sharp shrinkage. Government spending slowed significantly after the budget was announced in July. Sometime we can get into the zone where we can say 7 percent growth is a given. I think this data will make everybody, whether the Reserve Bank of India, policy makers in North Block and in Government of India, and people like you and me to think what we need to do to preserve and nurture the growth. It's great to see the chief economic advisor talk about the compliance burden that that is there. It's the first time people are recognising that.
When it comes to government capex there will be a natural correction in government spending, It looks like in October– November there's a revival. Yet work has to be done, and the government needs to even out its spending patterns.
Do you think it's time for India to move towards capital account convertibility?
I haven't heard anybody in responsible position talk about it, neither at the central bank, nor at North Block. My sense is, eventually we have to go there. It'll have to be preceded by current account convertibility. Now we are having the luxury of talking all this because forex reserves are at $650 billion. CAD is steady at around 1–1.5 per cent. However, for capital account convertibility, we should have a current account surplus, and surplus in trade account. Manufacturing has to become that much more competitive, and quality and supply chains have to be great. Per capita income needs to go up.
But, for all practical purposes, I don't think any businessman feels there is any curb on capital account convertibility, unless you want to do mega $10 billion investment or something and his capital base doesn't permit that. Every business is fully convertible in the capital account. The good thing about India is the control and our regulations. We control who and what comes in. We don't question the exit which is not what other countries do. They (other countries) will periodically stop a lot of dividends, royalties, profits, etc.
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