Commenting on last Friday's CRR hike by the Reserve Bank of India, Surjit Bhalla of Principal O(x)us Investments says that rate hikes by RBI is unwarranted.
CNBC-TV18 shares with domain-b its exclusive interview with Bhalla:
Were you surprised by what the RBI did and what is your take on it?
I was absolutely surprised. I have obviously talked to several people and read what everybody has written. The one thing that comes out is that even those who are apologists for this move are being very careful to say that they were both surprised and they thought it wasn't forthcoming.
So that leads me to believe that the RBI could not have made such a policy decision alone. I think we all can agree with the second conclusion that this policy has a lot more politics in it than economics behind it.
No economist could really have come up with this policy especially given the data because economists are trained to look at data, not at emotions. None of the data suggests that the situation, even after the interest rate hikes that have already occurred, deserve this sledgehammer treatment.
What I read is, the politicians feel that they are losing elections and therefore something needed to be done about inflation.
I find that a bit of a stretch that inflation has gone up by 1 per cent and certainly, the very popular Congress Party is losing elections because inflation has gone up by 1 per cent.
So there is nothing that seems to make sense with this policy.
Do you think it's a real risk for the stock market right now over the next one to one-and-a-half years as we head towards the next general elections?
I have been stating that no matter what bad policies the government can do, and we have seen that this government is capable almost anything that is bad.
Globalisation is on our side - that's on the side of truth, justice and the Indian economy. This would provide a check on balance on the activities of the government, the economic nonsensical activities of the government and I still subscribe to that view.
Take for example, the rupee is 43 to the dollar now. They had earlier cited that there was a lot of money coming in and they couldn't sterilise it, that liquidity was sloshing around.
So they raised interest rates in order that more money came in. Once the rupee appreciates, they will say the rupee appreciation will hurt our exports and interest rates need to be raised still further. But this does not make any sense.
One additional point I want to make on the political side - let's assume for a moment that the politicians are really worried about inflation and they are worried about losing elections because of inflation.
It seems to me there is a Trojan horse within the Congress political camp, which actually wants Congress to lose in every subsequent election from now on because with the economy tanking, that's exactly what's going to happen.
So with the politicians advising the government to get serious on inflation, then there is only objective or motivation, which could be that the Congress will lose the elections. There isn't anything in this that makes sense.
So I am challenging you to give me a point of view or an explanation that this makes any sense either for the politicians or bureaucrats or economists.
For a foreign investor, who is tracking economic policy in India, is there a credibility problem developing for the RBI both in terms of the political overtones of the moves they make and these frequent intermitting hikes?
Yes, I think. We should move faster towards independence for the central bank (the Reserve Bank of India).
Right now, there is no accountability whatsoever. If the central bank makes a mistake, they are probably right when they say "the politicians told us to it" and if the politicians make a mistake they say "what RBI did was wrong".
So this kind of policy diktats where we don't know where it is coming from and nobody is accountable is not very healthy for our policymaking. It is not healthy for the institution called the RBI.
We need to take a re-look at how monetary policy is made, and in particular, give much greater independence to the RBI. Right now, all the controllers in the world are now housed in the RBI.
So you want to take away lot of the jurisdiction but at the same time give them much more independence to do monetary policy, which is and should be their only function.
What if the RBI is not targeting a WPI inflation on number, but is genuinely concerned about pockets of overheating in the economy - maybe indiscriminate credit fuel demand which has happened. And its worried that this might lead to a lot of NPA kind of situations for the banks and is targeting that overheating of credit rather than a WPI inflation number?
No, that's a very fair theory. This was what economists around the world used to do 20-30 years ago, when they used to look at money supply and credit. Nowadays, nobody I know outside of the Indian RBI.
Even talks about what is a money supply. Economists talk about interest rates and about inflation and monetary policy, which has become an interest rate targeting policy and because the policymakers learnt that targeting money supply growth is something that you did in a closed economy, 50 years ago. You don't do that anymore, not in a globalised economy.
Fifty years ago, there wasn't foreign capital coming in, the rupee was overvalued, stayed overvalued and nobody knew any better. Nowadays, the world is sophisticated, and in that sense for RBI to talk about money supply growth and credit growth and talk about inflation and not seasonality in inflation is something that is unique to India. There are not too many other places where this is talked about.