Hike in rates to rein in inflation,asset bubbles: StanChart

MUMBAI: The Reserve Bank should keep its key rates high not just to fight inflation, but also to prevent the formation of asset bubbles, a top economist from Standard Chartered said today.

"I think the RBI needs to make sure that the monetary policy is tight not just to address the immediate inflation challenge but (also) to prevent bubbles and inflation problems being seen in the future," the bank's Chief Economist and Group Head of Global Research, Gerard Lyons, told reporters here.

Lyons referred to the days leading up to the real estate bubble burst in the US and the subsequent financial melt down, when "(Alan) Greenspan in the US, you could argue, kept policy (rates) too low for too long."

With a view to tame the inflation-- pegged at 8.66 per cent in April -- the RBI has increased its key rates eight times over the last 12 months. The latest hike at higher-than- -expected 50 bps points was made on May 3.

The May 3 decision is considered a turning point wherein the apex bank shifted from 'baby step' (25 bps) approach towards raising the interest rates to a steep hike to drain out the excess demand to soothe inflationary pressures.

The RBI has also taken measures to curb any possibility of asset-bubbles formation through a string of measures such as increasing the provision coverage ratio on teaser loans which involve staggered interest payments, among others.
"RBI and other authorities here in India are right to use macro-prudential measures for trying to curb property bubbles," Lyons said, speaking after the launch of its report India in the Super-Cycle.

The report says India will be a key player in the ongoing supercycle -- a period of sustained growth lasting over a generation -- and outlines the challenges ahead.

"We see in the next two decades, India will grow eight fold in size and we see India growing at 9.2-9.3 per cent per annum on an average versus China's 6.9 per cent," he said, citing the report.

Lyons said that because of factors such as hardening of global commodity prices, India's economic growth could slow down this year and the next, but long-term growth prospects for the country were very bright.

According to Lyons, key challenges for India to achieve good growth numbers way ahead are centred around getting infrastructure and regulatory environment in order.

"By infrastructure, we just do not mean the physical infrastructure, but also other factors like the skills and education of the very young population, so that they get good employment and also the institutional framework," he said.

If the opportunity of having a very young population is not handled well, Lyons said, there is likelihood of the demographic dividend turning into a "demographic disaster."

On the regulatory front, Lyons said the RBI should not insist on foreign banks adopting the subsidiary route while entering India, as international banks want flexibility to operate.