Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Let's accept the limits to growth - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Let's accept the limits to growth
Apr 3, 2015

Lowering interest rates is not advisable at a time when savings need a boost to spur higher investment and output

The Reserve Bank of India (RBI) will announce its First Monetary Policy Review for 2015-16 on April 7 against the backdrop of the agreement between the Centre and the RBI on Monetary Policy Framework signed on February 20, 2015. The detailed operating system is yet to be announced as also the determination of the composition of the Monetary Policy Committee.

The RBI is meant to have a greater degree of autonomy in deciding the monetary policy and, therefore, would be more accountable. The RBI would need to deftly steer a policy path which would take into account domestic developments on output, prices and the fisc, the government's articulation of its preferred monetary policy path,` international economic developments, the exchange rate and India's competitiveness.

There is an erroneous view that monetary policy should have a narrow focus on inflation and with the year-on-year inflation rate falling in the recent period, the appropriate policy response should be to reduce policy interest rates and ease liquidity. A rapid easing of the monetary policy would have adverse implications for a wider gamut of macroeconomic policies. Forecasts by various international agencies put India's real growth in 2015-16 at 7.5-8 per cent and the Economic Survey puts growth at 8.1-8.5 per cent. Given these forecasts, international pronouncements are that India would contribute to global economic growth more than the US, albeit less than China.

Overall growth

These international pronouncements would warm the hearts of influential Indian policymakers, opinion makers and analysts to advocate a strong thrust towards the magical double digit growth rate and these advocates would root for lower interest rates, easier liquidity, a strong rupee and a strong fiscal stimulus to step up overall growth. Finance Minister Arun Jaitley recently said, "I am quite certain we will see more cuts (in policy rates) in future. But as of today if you ask me how much and when, it is the domain of the RBI and I would leave it to them."

While this stance is an improvement over the previous government's pronouncement of open hostility such as "we will walk alone", an ideal situation would be for the finance minister and top government honchos to refrain from revealing the preferred monetary policy action, particularly close to the monetary policy announcement.

We in India need to be cautious when international opinion cheers from the sidelines. In between the lines would be the expectation of the international community that India would be the locomotive for global growth by rapidly opening its doors to foreign business and that it would maintain a strong rupee.

Contrast the euphoria in India to the caution in China. Vice-Premier Zhang Gaoli, on March 22, 2015, said "it is both impossible and unnecessary to maintain the very high growth of the past. We have paid the price for that. It is not sustainable". The Chinese authorities are unequivocal in their acceptance of the doctrine of potential for growth and the need to recognise that there is a limit for growth.

Indian dilemma

In India, advocacy of the concept of a limit to growth is treated as heresy. We need to recognise that gross domestic savings in recent years have fallen from 36 per cent of GDP to 30 per cent, and unless effective measures are taken to stimulate savings, growth will be stunted.

With strong signals that US interest rates could rise sometime in 2015, most currencies have been depreciating vis--vis the US dollar. Differential interest rates would warrant that the rupee depreciates significantly and as such it is unequivocally clear that the current exchange rate is grossly over-valued. An overvalued rupee brings in its wake, lower exports, higher imports, rendering large tracts of Indian industry, particularly micro, small and medium, uncompetitive. Our macho spirits calling for a strong rupee result in irretrievable damage to the Indian economy.

Given the present inflation rate, the expected growth of the economy, the possible increase in US interest rates and the likely continuation of large foreign inflows into India, it would be prudent to keep unchanged the policy repo rate of 7.5 per cent as also the accommodation provided by the RBI. If the US policy interest rates start rising in June 2015, or somewhat later, a reduction in Indian policy repo rates now would warrant sharper increases in Indian policy interest rates which could be dislocative.

Greater liquidity

With the continued inflow of foreign funds, it is likely that there would be an increase in domestic liquidity which would warrant open market operations sales of government securities by the RBI. A premature reduction in policy interest rates would result in strong pressure to reduce lending rates of banks which, in turn, would require a reduction in banks' deposit rates which would result in a significant reduction in banks term deposits which would dislocate the asset-liability maturity mismatches.

While the RBI would, in all probability, indicate a host of regulatory/operational measures, it would be unfortunate if the RBI continues to use a Nelson's eye on the blatant cartelisation of the savings bank deposit rate at 4 per cent.

While cartelisation issues are within the purview of the Competition Commission of India (CCI), the RBI cannot absolve itself. The cartelisation by banks is unconscionable and, as Sameer Kochhar of Skoch puts it, tantamount to stealing from the poor to reward the rich. The RBI cannot be a mute spectator while there is a gross financial atrocity. In the absence of a proactive role by the RBI, monetary historians would ask: "Why did the RBI sleep"?

Please Note: This article was first published in The Hindu Business Line on April 03, 2015.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Let's accept the limits to growth". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Is Mutual Fund Categorization Affecting Your Portfolio? Review It Now! (Outside View)

Jul 18, 2018

PersonalFN explains why a mutual fund portfolio review is necessary, particularly after the regulator's mutual fund categorisation norms.

A Sense of Melancholy (Vivek Kaul's Diary)

Jul 18, 2018


Mere Paas HRITHIK Hai... The Mother of All Trading Stocks (Profit Hunter)

Jul 18, 2018

You are missing out big gains if you don't own these 8 stocks.

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 18, 2018 (Close)