RBI-government spat shows central bank's independence, says Morgan Stanley India research head Ridham Desai

Mumbai: American brokerage Morgan Stanley on Tuesday said the Reserve Bank is more independent than it was in the past and the debate triggered by deputy governor Viral Acharya last week illustrates the progress on this front. Acharya had last Friday made a fervent pitch for independence/autonomy for the regulator and warned of punishment by the markets if it is undermined. “The RBI is more independent today than it has been in the past. Can it be even more independent? I think the debate will be resolved. The fact that it is there in the media, the fact that it is there in the open, suggests that we are a whole lot progressive than we were ever,” the brokerage firm’s India research head Ridham Desai told reporters here. He further said the fact that the RBI brass is speaking out illustrates that there is the central bank enjoys a lot of independence. [caption id=“attachment_5129811” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] Desai said both present Governor Urjit Patel and his predecessor Raghuram Rajan got the issue of independence sorted out with Prime Minister Narendra Modi, when the Monetary Policy Committee for rate setting was formed. It can be noted that Acharya had mentioned about the MPC as a work in the right direction but rued the absence of the same independence in other areas like regulations, balance sheet management etc. “Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Acharya had said delivering a lecture here. Desai said markets react to different aspects and pointed out that the comments were made with a much longer timeframe in the mind of Acharya. He said the markets have not yet factored in the outcomes of the general elections which are months away and investors will make their moves starting early December, once the outcomes of the forthcoming state polls are clear. But he warned of massive volatility if the market feels that a fragmented coalition will replace Modi. The brokerage expects a resurgence in private capex cycle after the elections as the capacity utilisation levels have gone up of late, and Desai said in the next 12 months we should see the revival. On the rupee,he said the $75-billion swap agreement with Japan and the Iran oil deal will help the currency. He said missing out on the troubles brewing at IL&FS are a big miss for the markets and added that over Rs 2 trillion in liquidity has been committed or made available to fight the difficulties. Desai said in the next five-seven years, a lot of retirement savings will be pumped into the equity markets, as was seen in the US in the past where the maturity of such investing leads to fund flows into equities. Morgan Stanley is underweight on information technology, as it feels the IT story is “done” and does not expect the currency tailwinds to last long. The brokerage that normally gives out its market outlook, did not proffer one this time around. Desai said since 1993 when it entered the country, GDP has grown 10-fold (from $260 billion to over $2.68 trillion last fiscal) averaging an annual growth of 7 percent, while the market cap jumped 22 times from $90 billion, averaging an annual growth of 14 percent. The Wall Street brokerage expects the economy to clip at 7 percent over the decade or so and touch the $6 trillion mark by 2028. It also sees the m-cap at the same level.