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Slow growth & high inflation will keep RBI policy in a bind: Ananth Narayan, Standard Chartered Bank

We were hoping for a softer number on WPI both on the core and the headline. This is a kind of a negative surprise for us.

ET Now|
Updated: Apr 15, 2014, 03.59 PM IST
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In an interview with ET Now, Ananth Narayan, Co-Head of Wholesale Banking, South Asia, Standard Chartered Bank, shares his macroeconomic outlook. Excerpts:

ET Now: Let us get in your views on the most dreaded number, the March core WPI inflation, which continues to remain rather sticky at 3.5% versus 3.2%. How would you react to this?

Ananth Narayan: It is somewhat disappointing. The fact is that we had negative IIP continuing, growth was clearly looking like being pretty soft. At the same time the expected relief for inflation was not really coming through.

We were hoping for a softer number on WPI both on the core and the headline. This is a kind of a negative surprise for us. Now the good news of course is that WPI by itself is not as important as it used to be given the focus that the RBI now has in the CPI and of course the bad news there is if WPI itself was impacted by the food reading, CPI with a much higher weightage should be impacted a lot more.

We will have to wait for what the final reading shows up today in the evening at 5:30 for CPI, but if this trend continues of slow growth followed by high inflation we are unfortunately in a policy buying at the moment. Do not really see a way out.

The basic vulnerability of the economy remains the slow growth, particularly in the infrastructure sector. Then what will be left with is hoping that a new government comes in and takes the steps to sort of instill that confidence back in the cycle, get the stuck projects moving on. Otherwise we look like getting into a bit of buying caught between low growth and high inflation, which does not board well.

RBI has made it very clear that they want to see trends and kind of a moving average rather than particular movements. Of course the real issue is we do not know how this monsoon will look like, there are talks about El Nino and the fact that if you have another spike coming up in the second half, then frankly this buying will continue for a while.

ET Now: But inflation stabilising as of now looks nowhere on the horizon and that is the exact age old debate that we have been having for quite some time as to who exactly is to blame for this scenario. Is it the government or is it tinkering with monetary policies, in whose court does the ball lie?

Ananth Narayan: What we are hoping for is once we have a new government, some of the low-hanging fruits, and frankly the lowest hanging fruit which does not take too much time is possibly kick starting the stuck infrastructure investments.

Now, it is a tall ask, it is not just a centre which has to take decision. A lot of decisions have already been taken in the last few months. A lot needs to be done at the state government level as well, which is where things seem to have got stuck right now. But assuming that we can actually kick-start some of these stuck investments, then that gets the highly leveraged corporate sector some breathing space. It starts to generate some revenues. It starts to give some relief to the stressed banks balance sheets and then maybe that brings back the confidence which will allow for growth to come back and the investment climate to come back over a period of time.

 
I firmly believe there is a place for monetary policy to play as well. It is not there in the thinking right now, but perhaps there is a way of actually having directed monetary policies which while tackling consumption based demand gives some relief to investments particularly in the infrastructure side.

There was a discussion on priority sector and whether incremental infrastructure lending could qualify for priority sector. So perhaps there is role for monetary policy to play as well just as you had directed relief to the export sector from the banking lending, perhaps there is something which we could do in the infrastructure side as well.

It is a combination of both, but the reality is as long as inflation plays out the way it has today and given that the RBI seems to be committed on the path of the Urjit Patel Committee report, things do look pretty bleak. The reality is we do need investment to be given all incentives it can and part of that could be lower interest rates for investments. Unfortunately that will take a leap of faith which is very different from the paradigm which is being followed today.

So best case, new government kick starts investments, starts the stuck projects and then changes the investment climate over time. Monetary policy does not face a large inflation shock, is at least neutral if not actually looking at trying to incentivise investments and then growth comes back in the system and that sort of brings the positive spiral back.

Eventually growth has to come up from the 4% mark to closer to the 6% mark for a lot of macro issues that have to be sorted out, whether it is fiscal, whether it is current account, whether it is even inflation, because supply side frankly has to come through investment growth and GDP growth reflected there.

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