The finance ministry in that monthly economic review is flagging growth risks to the Indian economy. They are saying there could be a spillover effect of geopolitical conflicts and the elevated valuations in advanced economies could hurt sentiment in India. Now, we have seen how the markets have been doing. We have seen significant volatility in recent times. Are there more domestic factors at play right now? Are there global factors like the spurt in Chinese equities and the Fed’s rate cut?
Swaminathan Aiyar: If you look at our stock markets, basically the foreign inflow has been close to zero over the last three years. Basically, it is domestic money that has pushed the markets up. So, this is an astonishing display of resilience. It is also puzzling to the outsiders. The outsiders keep waiting for a big correction, big correction. The big correction does not happen because every single month, it appears the Indian middle class has fallen so much in love with the stock markets that even more, even more money keeps coming out. So, we never seem to get to that stage where the Indian markets become so attractive that money pours in.
I think that particular situation is going to continue. We are not dependent. We most definitely have not been dependent in the last three years on foreign inflows to keep our stock markets going. It has been done almost entirely by our own domestic money. Those domestic savings, as far as I can see, are going to just keep going up. I talked to bankers, and they said that the middle class does not want to put money in fixed deposits. They would rather put them in mutual funds. It is a a very marked trend. So, as long as this is going to go, I think the Indian markets would be strong, Indian valuations would be very high.
For that reason, foreign money would be reluctant to come in, even as they sing praises of India’s long-term prospects. So, everybody agrees and some people will say, well, grit your teeth and buy India, even if it is damn expensive. That is the kind of message being given to investors in America and Europe and that will be the case. So, they will grit their teeth and they will invest limited amounts, but they will keep waiting for a correction, which I think will not come.
So, you do not think that a correction is going to come that will move the markets up. I wonder how long you think this entire thing will last. The RBI has maintained a cautious stance on interest rates because of inflation concerns. Do you think this balancing act is sustainable by the RBI or is there a risk that it could stifle growth further and damage investor sentiment?
Swaminathan Aiyar: There are so many debates about what the RBI will do or will not do. But frankly, the RBI has done absolutely nothing. Quarter after quarter after quarter, nothing happens. I mean, all kinds of meanings are read into a word here, a word there, into one of the minutes here, minute there said. But it is not as though we have a Reserve Bank, which has been actively manipulating rates to achieve anything.
Basically, every time you find the same as before and it has been continuing quarter after quarter after quarter. At this particular point of time, I would simply say that we do not have an activist Reserve Bank, we have one which is inclined to do relatively little and they are constantly worried about inflation, even though in theory, a central bank cannot do very much about food prices and fuel prices. Also, any move over the central bank is supposed to actually affect the economy with a lag of anything from 6 to 18 months. But I mean, we have got used to the idea that if there is any slight change in inflation, we believe that the RBI will veer here or there. But the fact is, the RBI has veered nowhere. We have just been having one fixed rate of repo rate for God knows how long right now. So, basically, we are waiting and watching. I will, however, say that because the Fed has cut interest rates and is likely to cut it again, that rather than anything on the domestic side, should ultimately prod RBI into cutting the interest rate by 25 or 50 bps in the coming year.Meanwhile, there are concerns about weak consumer spending and that is dampening growth. It is evident in corporate earnings as well. They are under pressure right now in the second quarter. Are we likely to see that pressure on earnings continue?
Swaminathan Aiyar: Frankly, this is a very deep puzzle. We are having a very high rate of GDP growth and yet you find sales are slack. Mr Arvind Subramanian, of course, will tell you that this is because the GDP figures are inflated and he will add various other things to show that the GDP rate is inflated. I do not know. There is a fairly deep mystery right now as to how you can have outstanding GDP growth. 8.2% last year, 7.2%. These are outstanding rates. But if these rates are growing so fast, why is consumption not picking up? Why are people talking about having to induce additional demand?
I mean, an economy growing at 7.2% should not be in need of any stimulus at all. So, there is a mystery out there. I do not know which way it is going to be solved. Will there be a major correction in the GDP data? If that happens, then there might be a case for a stimulus. If that does not happen, I see no case for a stimulus. You will just wait and say that maybe for some reason, a lot of money is going into savings or mutual funds, rather than going into consumption and in due course, consumption will pick up if not immediately.
What happens with credit growth which has seen trending down? How will that impact the banking sector that has shown resilience so far, at least in the markets? At one level, we are talking about liquidity, but credit growth is slowing down, isn’t it?
Swaminathan Aiyar: That is part of the puzzle again. Strong GDP growth is associated with a fast rise in credit. After all, growth has to be financed. So again, Mr Arvind Subramanian will say, aha! One more sign that the GDP data are being inflated. One more sign that if you have a proper reckoning of the whole thing, you will find that GDP is much slower. Let us see what happens. One way or the other, either you are going to have GDP data revised downwards or there will be a pickup of consumption. It is going to appear later rather than sooner. But the mystery has to be worked out. How is it that we have such a high rate of GDP growth and yet bank credit and consumption are slack? We have to wait to see who done it.