Did the May 3 overhang of the Federal Reserve hiking interest rates again have anything to do with a tame policy announcement?
Interest rate movements in India are a function of domestic and external factors. And let me add Indian policy is domestic factor dominant and external factor relevant. The United States is adjusting and these actions are considerably factored into the Indian policy. However, over the last two years one finds that global factors are increasingly becoming relevant.
The domestic factors on the supply side that continue to matter are the infrastructural bottlenecks and impact of the oil shock. At the same time, foodstocks and large forex reserves provide the necessary cushion. Against this, on the demand side, the enormous government borrowing programme and pick-up in the credit growth are positives.
Then what was driving your agenda this time?
Under the circumstances, I think liquidity management was the critical issue. This was done to accommodate credit growth and investment demand as well as the large government borrowing programme. It has to be consistent with the macroeconomic and price stability environment which is triggered through liquidity management, provided that inflationary expectations and the future course of interest rates are stable.
So much hullabaloo has been made over the need to check capital flows, particularly your speech which created a panic of sorts...
The speech that I gave highlighted an analytical point of view. There is a difference between analysis and policy formulation. I don't see capital flows reversing because they are a function of India's strong economic fundamentals and also the global interest rate environment.The strength of invisibles and remittances, along with the resilience of the external sector should see this situation persist for sometime.
We have seen one of the longest bull runs in Indian stock market history, do you see the equity cult tapering now to be replaced with an appetite for debt?
I cannot predict what will happen. What I can say, however is that gradually a major turn in interest rates has begun to take place in the US and other parts of the world and the transition has been extremely smooth. In fact the system has absorbed this very well. I would think there is no need to fear instability, either in the equity or debt market. Overall, we seem to have absorbed global risk -whether it is currency, interest rates or oil. It shows off our inherent strength as an economy. My observations are based on considerable analysis and that is why I am optimistic.
Coming up is the Indian Millennium Deposit redemption, I think the figure is in the vicinity of $7 billion. Do you see a blip on your radar?
Oh no, there are plenty of reserves and our liquidity management has been exemplary. We have sufficient expertise, will and skill in management of such events. Remember that we tackled a similar exercise in the Resurgent Indian Bonds episode which was to the tune of $5.5 billion. This is a different age that we live in. The Indian economy has matured like old wine.