Need longer-term holistic approach to the issues of growth & twin deficits: KV Kamath, ICICI Bank
'I am entirely with the Finance Minister. The rupee is grossly undervalued and we need to look at the structural issues to put things in context.'
Yesterday the Finance Minister in his speech said that the rupee is grossly undervalued. However, there are some economists who are of the view that it should be allowed to find its own level. Which side of the argument do you support?
I am entirely with the Finance Minister. The rupee is grossly undervalued and we need to look at the structural issues to put things in context. The rupee has reached where it is because of perceived structural challenges. We have twin challenges -- fiscal and current account deficits. The Finance Minister has said that the fiscal deficit is under control and going by his past record, he has delivered on whatever he has said. I have no doubts that he will do so this time too.
To tackle the current account deficit, we need to articulate a comprehensive strategy and I am sure that is what the government will now work on. We need to address the deficit rather than just meeting or covering it. That should get the rupee right.
Moreover, in the past, there was a direct correlation between movements of the Sensex and the movement in the rupee. Today, it is soley dependent on perception. I cannot understand why the rupee moved by what it did yesterday or the day before or the day before that either. The actual trades in the market have not been of a size which warrants this movement. That would have been in the mind of the honourable Finance Minister when he said that the rupee is grossly undervalued and I am with him on that front.
But both the Finance Ministry and the central bank's measures to curb the rupee fall have not yielded the desired results. Yesterday the Finance Minister pinned that on communication failure. Would you agree with that?
There are two challenges. One is action in a holistic manner on the various components of the twin deficits and the second is communication. I think that both of these will need to be addressed.
How big is the damage on the banks and do you think the RBI’s measures will be able to cushion the blow to the banks in the long term?
The interest rates have moved abruptly, consequent to a policy action, and that is where the central bank has given some relief, which is well within its ambit. In any case, we must remember that these are government bonds and if you hold them to maturity, you are going to get the specified interest rates. I do not think there is an issue there at all and I would thank the Reserve Bank for considering it.
The slowdown is due to two or three reasons. One, inability of completed projects to move ahead because of raw material constraints, primarily in infrastructure - coal, gas and ore. The second is inability of projects to get completed because the plug has been pulled when they were halfway through.
If issues are solved, a lot of the problems will get addressed automatically. As I understand, the Cabinet Committee on Investments is now progressively increasing the speed at which they look at projects which are stuck and are clearing them.
How long do you think the pain will really last?
I think that the measures that the RBI and Finance Ministry have taken are temporary. We need longer-term holistic approach to the issues of growth and the twin deficits. I think they would surely address these problems.