RBI has put the pressure back where it should be: Jim Walker, Asianomics

The Reserve Bank of India’s move to keep policy rates unchanged last week demonstrates why it is labeled as Asia’s best central bank, said Jim Walkermanaging director of Hong Kong-based Asianomics.


In an interview with ET, Walker, who is known for accurately forecasting the US slump in 2008, said India is a good trading bet now but it is not a fundamental buy as he is yet to see concrete evidence of the government getting serious about addressing its fiscal deficit and the overall debt. Edited excerpts:

The favourable Greek election result does not seem to have eased concerns among investors going by the way the market is attacking Spain. What are your thoughts?

The Greek election result did not reduce uncertainty (it would almost have been better if the leftists had won and a Greek exit all but assured). Instead, there will now be a Greek coalition which will have difficulty in agreeing over anything, but which must attempt to re-negotiate the terms of the bailout. This will be watched very closely by Ireland and Portugal which will also want to benefit from any easier terms offered to Greece. That leaves the political mess worse, not better. As for Spain, again, the Greek election makes no difference here.

Spain has a bust banking system because it is so closely related to a bust property market. The last plan was to bail out Spanish banks – through lending to the Spanish government – to the tune of 100 billion euros. That would have increased sovereign debt by 10% of GDP but why would anyone think that 100 billion euros was enough? Spain’s GDP is just over 1 trillion euros. Its corporate debt-to-GDP is 193% while its household debt-to-GDP is 91%, which is 284% altogether. Even if just 10% of that is bad it would require 284 billion euros to support the Spanish banks. The reason the markets have not settled is that they now recognise how big the problem is.

There is a feeling in the market that the eurozone break-up is inevitable. Do you agree?

Yes. It is the only quick way to get growth up and running again in the peripheral European economies. Their currencies have to devalue. Large chunks of wealth have to be wiped out and huge swathes of debt have to be defaulted on.

That is the only way to solve the problem quickly – economic growth would move into the 5-10% range within 18 months (of course, after the GDP has fallen by around 25%). The alternative is to do what the Europeans are currently trying to do – adjust a misallocated system via depression and deflation. The problem there is that it takes many years to adjust in this way which means many elections that might end up overturning the whole process.

The US economy is showing signs of faltering with jobs data showing a downward trend as you predicted earlier this year. What are the chances of a QE3? Will this be enough to revive growth?

The QE programmes have done nothing for growth or even addressed the core problem. There is still too much leverage in the system and economic growth will be subdued until people and companies feel happier about their balance sheets.

The US monetary policy just ensures that the process will be more like Japan’s than the experience of the Asian Crisis in 1997-98. Bear in mind that part of Bernanke’s whole plan, keeping interest rates at near zero, is deeply flawed. First, it signals to business that there is no growth coming and, therefore, signals that they should not expand. Secondly, it distorts the price of capital – which was the problem in the first place – and makes it impossible to calculate whether an investment is truly likely to make money or not. That again freezes the system. QE3 will not help in this respect at all.

(curtsey: economic times)

Rupesh Yatesh Dalal
Head Research Department

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