Markets are counting on a rate cut by the Reserve Bank of India (RBI) next week, but concerns on inflation have not taken a back seat. Hitendra Dave, managing director and head of global markets (India) at Hongkong and Shanghai Banking Corporation, shares his view on the domestic growth story in an interview with Parnika Sokhi. Edited excerpts:
How grave could be the impact on India if Greece exits the euro zone?
India will be impacted through the confidence and financial market route. Since it is a big event and implications are unknown, the assumption is that everybody will fly to safety. And, given that India has dependence on offshore funds for our capital account, it will have consequences. But the underlying economic activity will be far less impacted in India as compared to other countries because 70-80 per cent of our growth is domestically driven. Stock markets and the rupee may be affected due to Greece’s exit. However, the underlying demand, growth and structural factors will feed into India’s growth rate in the long term.
Are these positive factors good enough to attract foreign investments?
Somebody who wants to trade over three-six months time is rightly waiting on the sidelines. They want to see exchange rate stability, policy clarity and valuations become attractive.
Somebody who is looking at a longer-term perspective will possibly see this as an opportunity to get in, while there is too much risk aversion otherwise. However, risk aversion on account of international development is not in our control. Foreign investors who have been here over a period of time and have seen a 10-15 year cycle are not particularly perturbed. Investors who have entered in the last three-four years and perhaps not benefited by the India story, at least from the stock markets, perspective, are the ones who are highly focused on the noise.
How much do you think has tight monetary policy contributed to domestic growth slowdown?
Growth slowdown was intended the objective of hiking rates. There is a general consensus that wider policy issues form part of the reason why investment activity has stopped. The interest rate was a minor element of the reasons for growth slowdown. I think the fact that everybody would prefer lower rates is not a debate. If we need to stimulate growth, lower interest rates will always help. However, with a great deal of difficulty, the interest rate expectations have been contained and it might be advisable to be cautious in releasing those now.
What are your expectations from the coming monetary policy review?
The inflation data for May, to be released on Thursday, will give some clarity on the trend. The bias towards has growth has become more pronounced, especially after the dismal growth data. There is also a realisation interest rates play a very small element of the reasons behind growth. I don’t think there is room to do massive rate cuts because inflationary expectations after 12 months of increases would now just about be contained, which also you are not sure. But given that globally there is a push to growth, everyone is looking at the central banks. I think RBI will have to contend with the fact that nothing tangible has been done on the subsidy front from the time of the last policy till now. But GDP, oil prices and the global situation make a case for rate cut. If inflation data support, we can see a cut of 25 bps. There may not be relaxation in cash reserve ratio because the central bank seems comfortable in addressing liquidity concerns with open market operations as of now.