MPC may reverse last rate cut, no big hike cycle seen: Neelkanth Mishra

If we can sustain our growth rates, I think the inflow of risk capital is also likely to persist, says Neelkanth Mishra, India's executive director at the World Bank

Neelkanth Mishra, India’s executive director at the World Bank group, tells Asit Ranjan Mishra in an in-person interview on the sidelines of the ongoing 5th Kautilya Economic Conclave that he does not foresee a significant interest-rate hiking cycle by the Reserve Bank of India (RBI). Edited excerpts:

 

How does India ensure its current growth rate is sustainable in a volatile and uncertain world? 

Look, the drivers of growth are largely in India’s control. A large part of the demand that we are catering to is domestic. And the external demand, the biggest variable, is services, where the growth momentum is still quite strong. Having said that, the risks are coming from higher energy prices and the struggle to attract more capital. So, even financing 1 per cent of the gross domestic product worth of the current account deficit is becoming challenging because global capital markets are disrupted.

 

What we need to do, therefore, is keep the energy flowing, continue with reforms so that the inflow of capital can be sustained from new sources, and make ourselves more attractive in what is getting to be a tougher beauty parade.

 

If we can sustain our growth rates, I think the inflow of risk capital is also likely to persist. At the same time, in this period of significant turbulence, we have to prioritise macroeconomic (macro) stability. A steady growth rate compounded over many years is far better than trying to maximise growth in any given year.

 

What are the key reforms that you think the government should undertake? 

These are more like further easing regulations and allowing more risk-taking within regulatory bodies. A lot of the reforms need to happen at the state level in terms of deregulation.

 

These are not headline-grabbing reforms that everyone celebrates, but they have a substantial impact on thousands of businesses when they get done. So, if it takes 40 approvals to start a hotel versus the 120 approvals that were required last year, that is a substantial improvement.

 

Over the next three to five years, that will mean hotel capacity, tourist inflows, and the tourism industry can actually boom. So, those are the kinds of things that need to happen. And they need to happen at all levels of government, not just at the central government, which everyone watches like a hawk, but also at the state level, where there is a lot of positive momentum, as well as at the municipal level.

 

The latest monthly economic review by the finance ministry says that India should make the economy more competition-friendly rather than only business-friendly. Do you think there is at present a concentration risk in the economy? 

I would not call it a concentration risk. In capital-intensive sectors, there tends to be concentration because capital availability is a very critical part of competitiveness. And therefore, the larger firms tend to get larger.

 

But outside of that, we haven’t seen undue concentration. I think what the finance ministry is talking about is that once we have significant local competition, that means easier access to capital, easier regulations, and perhaps more entry of private equity and venture capital so that new entrepreneurs can also scale up their businesses. That is how China has managed to create world leaders.

 

There is a foreign portfolio investment (FPI) outflow from the equity market due to rising global bond yields and the lack of an artificial intelligence play in India. So, does it mean that it warrants a relook at the securities transaction tax and long-term capital gains taxes? 

I don’t think the two are correlated. So, if 10-year yields in global financial markets are disrupted because of fiscal stresses and fears that the West Asian conflict is lasting way longer than anyone expected, then commodity prices will remain elevated for a longer time. In this environment, it is hard to get money into equity markets, which are risky, and that too into emerging market (EM) equities, which are considered to be riskier.

 

Now, there is a whole different level of reform and discussion that needs to happen on whether EMs, even today, are riskier than developed markets. Many of the EMs — and India is a shining example — have significant regulatory certainty and a lot of macro stability, which some of the developed markets today cannot boast of. So, should asset allocators be applying the same level of risk weights that they used to? But either way, as of now, the plumbing is what it is, and therefore, this is not an environment where you get a lot of FPI inflows into equities.

 

How worrying is the rising inflation in India, and has raising policy rates now become inevitable? 

That is a better framing of the question than some of the questions I get asked about — “The US is raising rates, so India should also raise rates”. That’s not the right framing. The framing has to be: Is Indian inflation getting to concerning levels? Frankly, I do not think so. Meaning that we are perhaps growing slightly above our trend growth, but there is still slack in the economy. So, I cannot see sticky inflation metrics showing up. But the RBI monetary policy committee has to be forward-looking. So, you can’t wait for inflation to go up or core inflation to go up before you start acting, because you always act with a lag.

 

And an argument can be made that the last rate cut that was done was perhaps not necessary and can be reversed. But other than those minor points, at this stage, I don’t think we are at a stage where a significant rate-hiking cycle needs to be triggered. I have seen forecasts that talk about multiple hikes. I don’t see them as being required right now.

 

Inflation problems could emerge now because of the failed monsoon. Meaning that groundwater levels are going to be a lot worse than they were last year. Rabi sowing and rabi yields need to be monitored. And while that is also food, and it’s not something that interest rates can control, history suggests that if you have high food inflation for a year or so, then a lot of inflationary pressure starts building up. As of now, other than perhaps reversing the last rate cut, I don’t see any reason for rate hikes to happen.