RBI policy action 'deeply disappointing

Fund manager Samir Arora of Helios Capital is "deeply disappointed" by the Reserve Bank of India (RBI)'s stance of not cutting interest rates . He believes the RBI ought to have aided sentiment by cutting the repo rate.

Despite the pressure tactics of finance minister P Chidambaram over the last six weeks, the central bank has chosen to keep its eye on inflation even as it subtly asked the government to go beyond lip service in terms of fiscal reforms.

Below is the edited transcript of Arora’s interview with CNBC-TV18.

Q: What is your expectation for the last couple of months now after the reasonably good uptrend we have seen since September?

A: Broadly, last two months were okay, but yesterday’s event of the Reserve Bank of India policy was deeply disappointing. The economists who have sort of supported what the RBI Governor did say that inflation will go up for the next two months, but from January onwards there will be a window of opportunity because of base effect or some other effects.

All these guys including the Reserve Bank suffer from illusion of understanding which is that, as if you actually understand so precisely that what can change within month-two months. In a big picture sense, if these guys believe that interest rates can be reduced from January, it is too much over-analysis and too much an illusion that we are so much in control of things that if you do it two months before something bad will happen.

The problem is that the problem is being viewed too narrowly which is that inflation is high therefore interest rates cannot be cut. Let us widen the frame of analysis and take a slightly bigger picture. If we frame the problem in the following way that the Government of India or Congress Party has basically put itself on the line in terms of trying to do some reforms related to increasing prices of oil and reducing the fiscal deficit.

Secondly, these guys question that what the Finance Minister put out as his fiscal target whether it has credibility, whether there is meat behind it? Nobody has analyzed what the RBI policies for the last three years have delivered? Whether there is meat behind it? Nobody has told us in black and white that if you prepone interest rate cut by two months give us credible proof that it is so wrong.

At this point of time, where signalling is a key part of the strategy, where you have to reinforce what the reformists in the government are doing, what Mr. Chidambaram is doing, because he clearly is the new guy, so he can say that I was not involved for the previous two-three years in terms of what did not happen.

From day one you question his credibility; you question his plans, why should the rating agencies not question that? Why should foreigners not question that? Why should next week’s IPO happen? Why should flows come in? I read one of the reports today from Nomura saying that there is a window of opportunity in January, because in January for some reason the inflation number will look lower and therefore at that point you can do.

This is over-analysis and over narrowly framing a question and not taking even a slightly bigger picture view. From every angle, it is wrong to publicly question on day one the Finance Minister and say that he has done wrong. We have never questioned the strategists and the economists who come and say for the last many years and for the next many years that my number for next year for BSE is 20,000. We do not say show us the proof of your PE. Show us why it is 15 and not 14.8. Show me the history.

Broadly, at the first level you have to have some sense of cooperation and some sense of team spirit and then you say, no you do it or I do it. It is wrong. It sends a wrong signal. It basically makes economic players think that there is nobody believing anybody and the investors are the last guys to believe because they have the option of staying out or waiting. This puts so many things in question. Why should next week’s IPO or FPO of National Aluminium happen? If you do not believe anything anymore, it is wrong.

Q: Maybe the Finance Minister will come up with goods again by coming out with good blue print for fiscal deficit and that may eventually convince the RBI, one can only hope that that will happen.

A: This illusion of control and this illusion that we have this quarter point interest rate cut if we give it ahead of time - if we say ahead of time that okay we are cutting it, but you please do it before budget or whatever as if some heaven will fall. The point is again this illusion of control and illusion of understanding.

Look at it form the finance minister’s point of view; a major part of that fiscal deficit reduction does involve the stock markets in it. It does involve the fact that foreigners will come in and buy IPOs or FPOs. By the way we are disappointed on a separate level with the government in some sense of saying that we will not sell Specified Undertaking of UTI (SUUTI) shares or that there is not proposal.
 
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