Mr. Indranil Pan is a post-graduate in Economics from the Jawaharlal Nehru University, New Delhi. He started his career as a research assistant at the Indira Gandhi University, after which he moved to financial journalism thereafter and worked with Dalal Street Journal and Business India, handling economy and banking pages. Subsequently, he moved to the Advisory wing of CRISIL and was involved in a large number of economy related projects. He joined Kotak Mahindra Bank Ltd in September 2003 as the Chief Economist of the Bank.
Post the announcement of the monetary policy for 2005-06, we conducted a short interview with Mr. Indranil Pan, Chief Economist at Kotak Mahindra Bank. Read along.
Eqtm: What is your first reaction to the monetary policy?
Mr. Pan: Overall, the Reverse Repo rate increase came as a surprise. We were more concerned with RBI trying to maintain the growth impetus in the economy with expectations that high oil prices can be a growth dampener along with some fall in exports compared to last year (due to global slowdown). However, RBI has once again put a heavier stress on managing inflationary expectations (a stance that it had taken during the Mid-term Policy of last year), thereby justifying the increase in the Reverse Repo rate by 25 bps. RBI governor has also indicated that demand-side inflation must also be paid attention to for framing the policy.
Eqtm: What were your expectations from the monetary policy and have they been met?
Mr. Pan: As earlier indicated, one of our basic expectations from the policy was that policy rates will remained unchanged. However, that has not been met as RBI continues to stress on managing inflationary expectations.
Eqtm: What other aspects would you would have liked the RBI to focus on?
Mr. Pan: Even though RBI has mentioned about short selling of government securities, no action has yet been taken. Theoretically, speculation in the form of short selling contributes to an efficient price discovery and could have been focused by the RBI. The other point of focus could have been the corporate debt market that currently suffers from low volumes and is mostly illiquid. Development of a vibrant corporate debt market is essential to reduce the cost of borrowing of the corporate sector, especially at a phase when the manufacturing sector in India is on an upswing. RBI, on the other hand, could have also looked at enhancing FII participation in the Indian debt market. The other aspect that could have been looked into by the RBI was reverting back to the earlier 6-monthly cycle for reset on the Floating Rate Bonds, as these are treated by the market as short-term instruments.
Eqtm: What is your view on the interest rates and the overall economy (including credit growth)?
Mr. Pan: The interest rates anyways were expected to move higher, with or without the credit policy's move of increasing the Reverse Repo rate. This is based on the general aversion to invest in G-Secs by the Scheduled commercial banks, due to a spurt in the credit off-take. Due to this aversion, every auction of the Central Government is expected to lead to a rise in the bond yields. The yield curve is expected to remain steep due to concentration of issuances in the higher end of the curve. We now expect 10-year benchmark yield to move up to around 7.5% in the medium term. We expect overall GDP growth to be at around 7.1-7.2%, mainly on account of a revival in the agricultural production. The industrial segment is expected to slow down a bit on the back of high international global oil prices (that can hurt India's export performance as global economies slow).