RBI can't be very aggressive in cutting rates if Fed is not doing so in USA: Swaminathan Aiyar
Swaminathan Aiyar, Consulting Editor, ET Now, says the Reserve Bank of India may cut interest rates, influenced by a potential US recession but the US Federal Reserve's stance on inflation and interest rates could limit RBI's actions. A significant gap between American and Indian interest rate trends may cause capital market movements. India has performed well with higher interest rates, so immediate cuts are not essential. Aiyar also thinks that RBI cannot become very aggressive in cutting interest rates if the Fed is not doing so in the USA.
ADVERTISEMENT You are saying that the geopolitical situation is turning positive now and the equity markets are reacting the same way, a case in point being the Indian market. What is your current take on the market? How do you see the up move that we are witnessing right now? And yes, 9th July is going to be a critical day not just for the world but for the Indian markets as well. How are we heading towards that?
Swaminathan Aiyar: As I said, that is one of the big things that we do not know about. If you get a return to that high Trumpian reciprocal tariffs, that will be a negative. But there are two things: Trump is negotiating very hard to try and get a number of results and he will certainly announce some results and say, victory. He loves to announce victory. So, a certain amount of tariff will be there. But as far as I can see, the European Union is in no hurry. They are saying no, no, we are not going to just give way. We are going to take our time. We are going to push our things and they are very much against import duties on steel, aluminium, and especially cars.
Of course, there is an issue now which is going to be a big one – whether or not Europe can continue to tax what in India is called the Google tax, the practice of taxing of the biggest American MNCs on the basis of revenue and not profit because they are shifting the profit to offshore heavens. So, we will do it as a percentage of Google, so that is very much a thing coming up and the Europeans feel that this is one thing which can be used as a lever to get Mr Trump's tariffs down. Let us see if that happens and let us see how long that takes.
The EU is prepared to fight well beyond the 90 days. India has been in a mood to give in. But as I have always said, India should also be fighting because I do not think these tariffs are going to hurting us so much. At the end of it all, while the United States is an important trading partner, if it goes down, there are ways around it. One thing that we have seen very clearly is that the international trading system has been extremely good that if there is a high tariff on one country, you send it out. God knows to which heaven on what kind of invoice, but you are ultimately able to export it to the USA or some other desired country through a third party. The world seems to have been extremely successful in that and let us see whether it is equally successful in the case of the reciprocal tariffs.
When we interacted with you during the RBI rate cut recently, I remember your stance on liquidity. Now, we are hearing that the RBI is going to be holding a VRRR auction very soon. Is this a sign of a liquidity bubble because on one hand we have frontloading, and on the other hand, there is the VRRR auction?
Swaminathan Aiyar: I will simply say that RBI either on the basis of instructions or on the basis of Mr Malhotra's mood, is in an interest rate cutting mode right now. You can certainly justify that if you think that there is a coming recession in the USA which will pull down the world economy. You can say that at the time when the world is going into an era of somewhat deficient demand, why not try and pick it up by having a more aggressive monetary policy in the sense of pushing rates down rather than pushing the rates up? Mr Powell in the USA is not so keen. Mr Powell is very clear that he sees significant chances of inflation coming out of Mr Trump's tariffs and therefore, there is a hold on interest rates there. We tend to pretend that we have an independent monetary policy and we can set interest rates, but at the end of the day, if there is too much of a gap between the American trend and the Indian trend, then that will lead to huge movements in the capital markets and then the RBI is likely to shift. So, let us see.
ADVERTISEMENT If the Fed remains conservative on its interest rate now, that may act as a brake on Mr Malhotra's inclinations. It will be very interesting to look forward to. I would say that interest rates are not a critical part of whatever we are doing. India has been through relatively high interest rates for the last few years when we have done very well. So, it is not that India is unable to cope with high interest rates and they have to be brought down in a hurry. It is not essential. We have managed to do quite well. I have a feeling that Mr Malhotra or shall we say the RBI cannot become very aggressive in cutting interest rates if the Fed is not doing so in the USA.
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