What's your reaction to the credit policy?

The governor is saying "expect me to cut interest rates when you least expect it". He wants to control inflation through monetary policy but if you really want to control inflation, especially in food, then selective credit control is possibly the way to go about it.

More than that, fiscal and non-monetary policies are equally important. For instance, rice exports in the first five months of 2007-08 have been of the order of a billion dollars. When there is so much inflation - it may not all

be reflected in the five per cent inflation that RBI is talking about because the basket is different - perhaps there could be an export tax on rice. The government could encourage exporters to sell locally.

Are high interest rates likely to stymie growth?

 I think that is already happening. High rates have hurt purchasing power and consequently borrowings for products such as  two wheelers and there has clearly been a noticeable slowdown in sales in some categories. We need to recognise the incipient slowdown, which is partly because of interest rates, partly because of higher prices and partly because of the global slowdown.

I think there should be some measure to help the markets get money more easily at a cheaper price. For instance, the cap on the savings account rate should be freed, that's a big chunk of deposits for banks. Let savers benefit, why are they being forced to invest in other higher-risk instruments? Today, multiple intermediaries like PFC are simply adding to intermediation costs, they are not delivering value. Let there be competition among  banks.  Also, there are distortions like the tax breaks that money market funds get. This must go because it is keeping the interest rate structure artificially higher.

 How do you read the corporate results in Q3 FY08?

We have a mixed bag this time unlike the last two years when we saw continued profit growth. And expectations from both the world and domestic economies and the sentiment in the minds of business people is that there is going to be a slowdown.

Maybe we can achieve 8.5 per cent in 2007-08 but for 2008-09, we will probably see a slower growth rate, of around 7.5 per cent or maybe even lower if oil prices remain at this level. Don't forget that we export a fair amount to the US and also  some part of what we export to China or elsewhere also finds it way to the US.  So, a slowdown there cannot but hurt world markets and I think all indications are we are going to see a recession there.

 Will India see lower capital inflows as a result of the slowdown?

I think India will see a slowdown in capital inflows, as will world  equity markets, because there will be more asset transfers to debt instruments. Worldwide, there will be greater risk averse behaviour and that is already noticeable in the inflows into debt instruments in the US and now in Europe. As for India, the remarkable, and possibly excessive, ease of access to capital that we have seen, will get cut down.

And that I think is good because capital was being spent unwisely, and there was some profligacy.

Which way do you think the stock market is headed?

The stock markets have to recognise that we will have a correction. Already, some of the froth has gone, but in my opinion, some of it is still left. But, it could translate into much higher froth if the expectation is that profits will drop far more sharply than what we imagine today. 

For instance, if the world really heads for a recession, or if there is negative growth in the world, we may see far greater correction in profits than we anticipate and the markets could drop further. As I said, now it's marginally frothy because the domestic economy is still  strong. But we need to have the right policies otherwise we may be dragged along with a global recessionary phase.  

People are talking of the decoupling of the Indian market?

There cannot be any decoupling, we are living in a world that is inexorably interconnected. It's not just through the FIIs but through the sentiment. It's impossible to be decoupled. Our strength is our economy, we must nurture it with the right policies, perhaps bring down excise duties.

Of late there has been a surge of domestic liquidity into the market. Do you see domestic money becoming the mainstay of the market in the near term?

That will happen only over time, it can't happen overnight. People in India are still risk averse. It's true that the two per cent of  household savings that used to go into equities has increased, directly or indirectly, and will continue to increase. Having said that, it's a gradual process and we don't want to accelerate it. People should feel comfortable with the risk they're taking.

Do you think there is froth in the real estate market?

 I think there's a huge amount of froth in the real estate market. We are becoming uncompetitive at rentals of Rs 500 per square foot (in Nariman Point) plus taxes. Who in his right mind can say this is a competitive scene? If rentals for IT are Rs 60 per square foot per month even in a remote area, it is not competitive.

It looks cheap to us in comparison to Mumbai city but it is not competitive vis-�-vis the world market. So, we will see the service sector will become uncompetitive because we also have to look at cost of transportation and housing. The integrated units may be a solution but the land  values that we are talking about in SEZs are just getting outrageous. We are in great danger of losing our competitive edge because of this unbridled appreciation in property prices, partly because of land banking and land grabbing.

Foreign money is coming in and grabbing land from poor farmers and the value of the land is going up dramatically because these people get all the permissions.