The Reserve Bank of India (RBI) should increase its policy rates and align them with the real economy to check the rising inflationary pressures, Morgan Stanley Asia chairman Stephen S Roach said here today.
The economy, which is now gradually exiting from the monetary and fiscal stimuli, is behind the inflation curve, implying that further tightening is essential, Roach said.
"If you leave the interest rates where they are, then you are asking for trouble...You need to set a target for the policy rates, which is consistent with the state of real economy," Roach said.
The central bank which began exiting its monetary policy stimulus since last October by restoring the statutory liquidity ratio (SLR) to 25 per cent, hiked its repo, reverse repo rates by 0.5 per cent each to so far this year and cash reserve ratio by 0.75 per cent.
The central bank, however, is facing the dilemma of holding off high inflation, which was 9.59 per cent in April, while supporting the economic growth, projected at 8.5 per cent in the current year.
Replying to a query, Roach termed the declining domestic savings rate, which has fallen to 32 per cent, as a concern to the policymakers. "It does need to get back to the savings rate at high 30s," Roch said, adding the high fiscal deficit is also a cause of worry.
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Commenting on the ongoing debt crisis in European Union, Roch said the crisis does not have the magnitude of the 2008-09 sub-prime crisis. "The EU crisis is serious but not flashing the type of danger it could be...It is negative but not disastrous," he said, adding however, this could make some impact as the country has nearly 21 per cent of its exports to Europe and this could also affect the capital flows.
The European nations and International Monetary Fund raised a mammoth $1-trillion rescue fund to bail out the crisis-ridden Greek economy and to avert the contagion in other neighbouring economies.
On China, Roach said the unsustainable current-account surplus in China is destabilising but the country has started realigning its growth model to improve the domestic private consumption. "I think China gets that and they are very focused on changing the growth model to provide stimulus to internal private consumption rather than exports," Roch said, adding the Chinese economy may see a slowdown in the H2.
Roach would not subscribe to the argument from some economists that the undervalued Chinese yuan is destabilising the world economy. "Some economists say the undervalued yuan is the most destabilising force in the world economy. I totally reject that line of reasoning...The idea that China is manipulating its currency is wrong," Roach said.