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RBI has room to cut rates by 50-100 bps: Arvind Panagariya

The Reserve Bank of India has room to cut interest rates by 50-100 basis points, feels Arvind Panagariya, Vice Chairman, NITI Aayog.

In an interview with CNBC-TV18, Panagariya says the time is ripe for a rate cut, and that investment sentiment is turning for the better.

“The case for cutting their rate is so strong, that whatever the Fed does, we are ripe for a rate cut of maybe say another 50 basis points,” he says.

He says the economy can still grow 8 percent this fiscal despite a sluggish start in the first quarter.

“They (first quarter GDP numbers) may get revised upward, there is possibility. And I would not write off the prospects for getting passed 8 percent growth rate; we have had quarters when we have grown 9-10 percent,” he says.

He says other states can learn from tamil Nadu, which has amended the earlier Land Acquisition Act with the President’s assent.

Below is the transcript of Arvind Panagriya’s interview with Shereen Bhan on CNBC-TV18.

Q: Let me start by asking you what the general mood is as far as the economy is concerned? The Prime Minister held a mega meeting, you were part of that meeting along with the Reserve Bank of India (RBI) Governor, along with the Prime Minister’s Cabinet colleagues. In attendance was the who is who of India Inc. What is the sum and substance at the end of that mega meeting? I understand that several concerns or suggestions were made by industry in terms of what to do to kick start the growth, but are there any real outcomes expected post that? What should one expect?

A: It was a very positive discussion and generally the industry and the economists who were present were very optimistic. And lots of suggestions got made. So, I should not talk about what the suggestions were, but lots of good suggestions.

Q: You will not talk about the suggestions, but let me bring on the table, I believe what was one of the key concerns that was raised and that was the high cost of capital. On August 28, you have said that the reserve bank should be more aggressive when it comes to cutting rates and they should in fact go as high as 50-100 basis point rate cut. In that meeting as well, of course, polite clamour for a rate cut was made in front of the RBI Governor. We have the credit policy now coming up on September 29, do you believe the time is right for a deeper rate cut?

A: I have said this before; those were not quite my words that the RBI should be more aggressive, those are your words. But in substance, I have said this that we need a rate cut of 50-100 basis points. I think time is right.

Q: Do you believe that whether or not the Fed actually lifts off in September, which is the expectation. It is actually still split on whether we should see the Fed move in September or perhaps push it now to December. Do you believe that that could weigh on the RBI Governor’s mind ahead of the credit policy?

A: My view has been that the case for cutting their rate is so strong, at least from what I understand, that even if the Fed actually raises the interest rate, in any case, it is going to be baby-steps. It is not going to be a mega increase in interest rates b the Fed. But, whatever the Fed does, we are ripe for a rate cut of maybe say another 50 basis points.

Q: If there is no rate cut of 50 basis points, if it is 25 basis points, do you think that will really help change sentiment, turn things around?

A: The direction is right and past 75 basis points reduction, it will add up to a percentage point and maybe this will then also begin the process of the pass-through with a little stronger effect. Currently the pass-through has been from what I understand about 30 basis points or so out of 75. So, there is room also for the interest rate to fall through the pass-through.

Q: The government continues to maintain that it is optimistic about growth picking up in the second half of the year, but do you believe that the targets set up by both the budget as well as the economic survey of an 8.4 percent kind of growth number for this particular financial year is under stress given what we have seen as far as the latest gross domestic product (GDP) print is concerned.

A: We still need to wait. Maybe these are preliminary figures for the GDP, first quarter also. They may get revised upward, there is possibility. And I would not write off the prospects for getting passed 8 percent growth rate. We have had quarters when we have grown 9-10 percent.

Q: But the monsoon picture is looking week, which will obviously impact agriculture. E We are not really seeing high frequency data suggests any kind of big upmove as far as sales are concerned. Corporate earnings continue to look muted at this point in time. What gives you the confidence that we are going to see such a sharp pick up in the second half to be able to get to that eight and a half percent number?

A: There are three more quarters left and as I said, the first quarter may itself actually turn out to be higher than what it is, so the pick up required id [4.34] one percent if we go by the current first quarter figures. I think one of the three quarters, so the pick-up required is not huge when I spread it over the three quarters. And, certainly, the mood was very positive at this meeting. But also we are seeing in this in terms of investor sentiment, investors, even foreign investors who are keeping out are now beginning to actually return to India. Foxconn has made a big announcement. Xiaomi has actually committed to manufacturing in Andhra. And so, I think the investor sentiment is turning around and the message that the government is actually moving is passing through.


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