‘India continues to be a stable place despite global shocks’

The Reserve Bank of India may have room to ease monetary policy following the government’s decision to stick to the fiscal consolidation path, says Kalpana Kochhar, a deputy director in the Asia and Pacific Department of the IMF. In an interview to Prasanta Sahu, she says that despite the global economy facing many challenges such as volatile markets and capital flows, India continues to be a stable place withstanding the shocks. Excerpts:

Has the Budget created space for RBI to ease monetary policy?

Everything else being constant, certainly it gives the RBI room (to ease the policy), because it reduced pressure on demand and therefore on inflation. The  RBI decision would reflect what it thinks would be the impact of the Budget's fiscal consolidation on prices.

How will the current global economic environment impact India?

There is a lot of turbulence in the global financial markets, including in China. But a positive shock, especially, for India is the low oil prices. Currently, our forecast is that oil prices will remain low for the next two years and this is a huge windfall for India. As you know, even last year it supported demand in India as well as the improvement in the external and fiscal situation. It helped the strong GDP outcome also. So, we think growth in India will continue to be underpinned by strong domestic demand, befitting from low oil prices. We are also seeing some pick up in private investment albiet slow,  broadening and underpinning the recovery. So, India is actually in a very good situation to withstand the shocks.

Will the European Central Bank’s monetary policy stance hurt India?

The Bank of Japan and the ECB are the two large central banks that are in the easing mode. There are quite a lot of questions about emerging markets. Brazil and Russia are doing very poorly. There are questions about China too. India seems to be generally a stable spot. What the country has to be vigilant about is the potential volatility in capital flows. For that, India having a flexibly managed exchange rate in the first instance, is probably, the best policy response. Also important is to have a credible and stable macro economic policy. With the introduction of inflation targeting, India has moved to a very credible and transparent monetary policy framework. The fiscal consolidation path outlined in the  new Budget is very welcome too.

Do you think there was laxity in governance of PSU banks in India?

It is very difficult to say how much of the previous problems (NPAs) were caused by (issues of)  governance, because there were a lot domestic and external shocks. External factors include the global over-capacity in some sectors which are no doubt impacting India. Secondly, there are some domestic sectors, mainly in the power sector and infrastructure more generally. The government came up with the Indradhanush programme to tackle governance issues. With this and truly independent managing directors and CEOs, loan decisions will improve.

Will sharp fall in oil prices hurt remittances from Gulf countries?

To the extent there is a prolonged weakness in the gulf economy, remittances to India could be affected. But, overall, given the significant windfall from lower oil prices on the current account, we think the impact of slower remittance growth if it were to materialise, will be manageable. Also, keep in mind that, FDI flows have been very strong into India. Remittances have traditionally been a very stable source of capital flows to India even in turbulent times.

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Source:Yahoofinance.com