Dr. Rakesh Mohan is the Deputy Governor of the Reserve Bank of India. Before his current stint with the RBI, Dr. Mohan had been working with various government research agencies and is also an author of a number of books on the Indian economy. He was also a Member of the Economic Advisory Council to the Prime Minister and Telecom Regulatory Authority of India.
In an interview with Equitymaster and Personalfn, Dr. Rakesh Mohan, Deputy Governor, RBI shared his views on the domestic and global economy.
EQTM: What is your view on the strength of the economy currently?
Dr. Mohan: I think one of the key messages given in the annual policy statement is that after a very careful review of all the domestic developments and external developments, we see the economy in a very healthy shape and we have even used phraseology to say that we expect to be among the top performers in the world. So I think that there can be no ambiguity about our view on the health of the economy and to go a little more detailed, with the normal monsoon that the Indian meteorological department has so far forecasted, we expect the agriculture performance to be normal, which means essentially on trend. So it will be something between 2.5% to 4% growth or something like that. We are seeing an industrial recovery, the credit growth in the last six months of the last fiscal year (FY04) was particularly high. We are seeing as I mentioned in the last comment that I made, that we are seeing a change in the industrial competitiveness and the manufacturing competitiveness and of course services sector has continued to grow. This is how we have come to the assessment that the economy will grow.
EQTM: Do you feel that the rising global interest rates can have an impact on the domestic interest rates?
Dr. Mohan: Well, I think the way you look at it is, that in general our financial system is more stable than many other countries. This point I mentioned strictly with regard to the emerging markets. Second, in the case of US, UK and European Central Bank, the downward phase when interest rates went down, was much further than our interest rates. This was partly because of the inflation differential and so it wasn’t a case when they went down that out interest rates followed to the same extent. So, similarly as they go up in the west, they are following us. As we have said that the domestic factors are much more important in our situation. Looking at the whole international situation and domestic situation on balance, we don’t see that great an effect of some of the international uncertainties on domestic economic situation and interest rates.
EQTM: With non-food credit having picked up in the last 1-2 quarters, do you see a continuance of the same and do you see the investment cycle continuing strongly the way it has?
Dr. Mohan: Looking at the kind of growth that has taken place, one would expect the investment activity to be picking up along with the business confidence etc. But one does not have enough data to be able to say very clearly that investment activity is picking up except that capital goods imports have been going up in the last two years as well as capital goods production. These facts clearly point in that direction.
EQTM: What is your view of the impact of crude oil prices on the economy?
Dr. Mohan: Oil prices always have an impact on the economy, but I think what is important to see is that in 2002 or 2003 when a very significant price rise took place, not very much happened in terms of the effect on the domestic economy. I think that the situation now is different from the situation ten years ago in terms of the effect of oil price increase. But of course, the answer to your question is yes, there is an impact.
EQTM: In your experience how does the change in government impact the continuance of the economic reforms process?
Dr. Mohan: I think that you have to examine what happened in the previous years, that we have had 6 governments, including the 13-day government and a very pretty stable domestic economy, domestic financial sector and continuation of the economic reforms in a certain direction. And in some sense, you have actually now just about every party in the system who have been in power at some point or the other in the last 13 years.
EQTM: Something very interesting that was mentioned today was ‘capital index bonds’. Could you throw a little more light on the same and indicate whether it would it be available for the retail investor or would it be for mutual funds or larger institutional players?
Dr. Mohan: Basically we have been constantly trying to diversify. Being the debt managers of the government, we have been diversifying the set of instruments through which government borrowing is done also from the investor’s side to match different investor preferences. So we have floating rate bonds, we had capital index bonds also. What we have done is that we have put a report on this and I think as we get more comments on that it will be designed further.
EQTM: Will it be for retail or is it yet to be decided?
Dr. Mohan: No, I think there will be much difference in the stand of issuance, but there is a proportion of the bonds that are issued for retail investors and now that the system is available in the stock exchanges for the investors, so they should have access to it.
EQTM: Coming to the RBI guidelines, which came out in March this year, about permitting Indians to remit US$ 25,000 with some few restrictions. What was RBI’s thinking behind this move?
Dr. Mohan: The kind of change that has taken place in the external situation of the country and the level of current forex reserves enabled us to take this as a measure.
EQTM: Do you see this limit being revised?
Dr. Mohan: No, I think it is too early to say that. We have been under constant review and we will see how it works.
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