Ever since the Federal Reserve took emergency action earlier this week and cut rates by 75 basis points, the billion-dollar question on everyone's mind has been: will this open the floodgates to a surge in dollar inflows? Is India prepared to face another dollar deluge? In an exclusive interview with CNBC-TV18, Finance Minister P Chidambaram says he's fully prepared.
Chidambaram said that their main concern is inflation because "We have a lot of poor people".
He said that he couldn't find fault with the Fed's action to prevent US recession. "Cannot comment on rate cuts, the RBI Governor will do that," he said.
Bankers have been urged to cut rates to spur sectors like consumer durables. And interest rates should be cut if it is hurting consumption, he said.
Indian economy has paid the price for the appreciating dollar. He said Budget '08 will aim to fully fund Government's flagship programs.
Excerpts from the interview with P Chidambaram.
Q: Your opinion on the Fed rate cut? I think opinion here in Davos is divided on whether it was too little too late, too hasty, too knee-jerk or whether it was exactly what was needed from the central bank to help jump start the economy and bring some calm to the markets?
A: If the US’s assessment is that the US economy is heading towards a recession or a very traumatic slowdown, the textbook response is 'stimulate the economy'. So that’s what the US Fed seems to have done. Now unless the critics point to an alternative package and then we are able to weigh that package against the one proposed by the US - tax rebates, cut in interest rates and some legislative action to freeze interest rate on mortgages. How can we find fault with this action? So, I think we should see what the consequences of this action are, because I have not heard or seen an alternative package to stimulate the US economy.
Q: What then is your opinion of the fact that Jean-Claude Trichet of the ECB is refusing to cut rates and in fact, has made a statement saying we are more focused on inflation right now?
A: That’s true. Historically, the US has been more concerned about jobs, growth and then inflation in that order. Europe has been more concerned about inflation. So, a number of my friends have told me that that’s simply a European response to problem versus an American response to a problem.
Q: What are we going to be more concerned about?
A: Our concern is inflation, because we have a large number of poor people and they understand growth less, they feel inflation more. So our concern is inflation, but our goal is moderate inflation without affecting growth.
Q: Both the Finance Ministry, the RBI and the joint actions of the government have managed to bring inflation down to below the targeted rate. This year we have had some good weeks of good inflation numbers coming in. But we have a situation of a potential global slowdown. Does the economic situation right now across the world, warrant a rate cut in India in your opinion?
PAGE_BREAK
A: I can’t talk about a rate cut, certainly not to a TV channel. Rate cut is the province of the Governor. The Governor consults the government. We give our views, but that is privately. The Governor's task is not easy. He has to moderate and contain inflation even without hurting growth. That is not an easy task. We will see as we go along. There is pressure through commodity price rises and food prices. We will have to bear in mind all that before we take a view.
Q: A couple of weeks ago, it was reported that you met with bankers in India to speak with them about reducing lending rates. So, if I were to assume on the basis of that, that you are in favour of lower rates in the economy, then that would apply to what the RBI’s potential action could be in the coming months? I am not talking just about this monetary policy announcement that will happen at the end of this month.
A: As a long-term policy, it is good to have benign interest rates, because that spurs growth. When I spoke to the bankers, I did not have in mind monetary policy. In fact, I said after the meeting that monetary policy may be accommodating or otherwise. But nevertheless, I urged bankers to cut lending rates so that the sluggish sectors, consumer goods, both durables and non-durables will pickup. Consumption drives production, production drives investment. So, it is very important that we keep an eye on the consumption figures, and if we find that the consumption figures are falling, it is imperative that we give a stimulus to consumption.
Banks in India enjoy a rather generous net interest margin compared to banks elsewhere in the world. So, I told them it is in your interest to cut interest rates by at least 50 bps. I did not have monetary policy in mind at all. In fact, I made it clear that that was regardless of what the Reserve Bank will do three or four weeks later.
Q: If inflation is well within control and we are facing a global economic slowdown situation, then why should the RBI not cut rates?
A: That is a judgement that the RBI should make.
Q: But corporate India is crying out loud for an interest rate cut. They are saying help us prepare for a global economic slowdown, help us strengthen India Inc. to be able to take on a global economic slowdown. Wouldn’t it then be upon your Ministry to talk with the RBI or convey your wishes of a rate cut?
A: You should have asked corporate India how and why interest rates are hurting them. Is it hurting their investments or is it hurting consumption of their products and services? I don’t think interest rates are hurting investments. There is an investment boom in India. In any way, interest rates have a very small weight in the overall cost of investment. If it is hurting consumption, then yes, corporate India is entitled to plead that interest rates must be cut to spur consumption.
Comments
0 comment