HomeEconomy NewsIndia will pay a price for undermining RBI's independence, says Citigroup's Willem Buiter

India will pay a price for undermining RBI's independence, says Citigroup's Willem Buiter

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By CNBC-TV18 January 1, 2019, 6:55:18 PM IST (Updated)

India will pay a price for undermining RBI's independence, says Citigroup's Willem Buiter
Willem Buiter is special economic adviser, Citigroup. Buiter, a former professor of political economy at the London School of Economics and former Bank of England Monetary Policy member, has never been afraid to speak his mind.


India will pay a price for undermining of central bank's independence and the government’s interference in the Reserve Bank of India (RBI) is not a good move, Buiter said.

"Oil prices are weak and that helps a number of emerging markets including India," he said.

In an exclusive interview to CNBC-TV18 Buiter shared his outlook on the emerging markets (EMs), the US Fed, the US-China trade war and other geopolitical risks, among a raft of other topics.

Watch the full video here:

Edited Excerpts:

While the US Fed may have said that it is reducing the number of rate hikes, the fear is that its balance sheet reduction is on autopilot that it will reduce its balance sheet by the pre-decided amount, is that a right premise?

The US Fed’s balance sheet has never been an auto-pilot. The schedules that they produced just reflects their expected or their planned balance sheet contraction. If there are objective economic circumstances such as sudden tightening of financial conditions that warrant an interruption of the balance sheet contraction, it will happen, they are not set in stone.

What you are saying is this planned contraction of the Fed balance sheet, which is $50 billion every month, could change?

Globally, I think 2019 is likely to be a year that most of the world slows down, not recession material yet but a distinct slowdown. The US and China both are slowing down for a few of the domestic reasons. On top of that, we have the trade conflict, on top of that we have the partial shutdown of government in the US, we have uncertainty in Europe both related to Brexit and to rising populism so there is more than enough to make for a steady global slowdown during 2019.

Given this kind of a slowdown that you are seeing, is there a chance that the Fed may, therefore, contract its balance sheet less? It has already indicated it will hike less but may it contract its balance sheet less than the current timetable suggests?

The US can slowdown but still can grow faster than potential output in the US. They are growing currently at a rate of just under 3 percent. Potential output growth is no more than 2 percent in the US in our view. so that means that even if they slowdown by 4 percent point over 2019 - which would be top of the range estimate – then they would still be growing roughly at potential output. So the Fed can continue to hike slowly and gradually during 2019 unless they anticipate something much worse happening in 2020 in which case they should hold off a rally in 2019 but I don’t think they are there yet.

The Fed last time decreased its rate hike guidance for 2019, reduced it from 3 to 2 but what is your sense then, how many rate hikes are you factoring in and as well once again to come back to the balance sheet issue, how different will be the balance sheet contraction according to you vis-à-vis the guidance of $50 billion per month?

I think we are going to see a couple of more hikes in rates most likely in the US probably later in the year not March but more like May or June and I think it will for the time being continue to contract the balance sheet in this very gradual and measured way of $60 billion a month.

The Fed will not change its course of action unless there is visible evidence of faster than the expected weakening of economic activity in the US both current and perspective. The Fed is somewhat more optimistic about US real economic prospects than the market, which accounts for the dichotomy in sentiment between what the market feels which is fear and loathing.

That will be a bit of a worry if the Fed thinks the economy is doing better than the market. Let me come to the other worry for financial markets, which is the tariff war. Do you think US and China will find common ground on tariffs before that 90-day deadline expires?

We really don’t know what is going on. Yes, we had another conversation between Xi Jinping and Donald Trump but the meaning of that in terms of concrete progress in the trade negotiations is very unclear.

Remember, these aren’t pure trade negotiations, these aren’t even trade plus tax plus intellectual property right negotiations, this is the new cold war between a rising hegemon - the hegemon of the ascendant - which is China and hegemon of a relative decline, which is the US. That particular fight for global and regional dominance pre-eminence will be fought out in a range of arenas not just the economic, no matter how broadly defined it, pretty diplomatic and in different regions even militarily so there is a lot on the plate of Xi Jinping and Donald Trump that goes way beyond normal trade negotiations that we have seen between the US, Canada and Mexico. Those were trade negotiations. Between the US and China, there is this global dominance negotiation.

Do you expect 2019 to be a year of slowing growth, falling investments because of all these uncertainties on the trade front and other fronts?

Yes, definitely. This sends a projection that the global economy will slow down driven by China and the US. The US because of domestic reasons; the unwinding of the fiscal stimulus and China also because of domestic reasons, the unsustainable credit in debt boom and bubble that they have been using to drive the economy fall in 2008 and on top of that we have the trade wars and economic uncertainty created by the temporary suspension of part of the government in the US plus uncertainty in Europe. There is no doubt that this will affect capital expenditure, affect property values and  market valuations though I do not think we have seen the worst of the stock market yet for instance.

Coming to the other issue which may have an impact and I want you to view. President Trump has also withdrawn US armies from Syria and Afghanistan. Will this add to the geopolitical instability in those areas especially the Middle East and will that in-turn influence the price of crude oil and hence financial markets?

I do not think that these actions even though they may be geopolitically important, have any obvious implications for the global economic outlook in the short to medium-term because this is just a confirmation that Trump act unilaterally and sometimes quite impulsively when he feels strongly about something and this should not come as a surprise. He has announced since before he got elected that he wanted the US to stop being the policeman of the world and the global disseminator of democratic values. So this should not be a surprise and I do not attach any economic significance to it.

The other issue which has troubled financial markets, we have heard President Trump threatening to fire the Fed chairman Jerome Powell. Do you think if the Fed persists with its rate hike calendar or balance sheet contraction, as you say it will, the President may actually fire Powell?

That is I think rather unlikely because the President can fire the chair of the Fed only as it is called for cause and cause is generally interpreted although we have no precedence for this as excluding disagreements about policy. It might be possible that firing a governor, it might be possible for him to fire Powell as chair but having to leave him as a governor which will be very strange situation because the last rate decision by the Fed board and indeed by the Federal Open Market Committee (FOMC) was unanimous. So I do not think that Trump is going to go there although you can never be completely sure his propensity to an expected and rather over the top things is not being underestimated but Powell’s position look safe to me.

What does all your economic prognosis mean for financial investors? Where will smart money go in 2019 given the slowdown you see in the US? Do you think funds will rediscover emerging markets?

Global slowdown is likely to occur during a period of still rising US policy rates and still quite high US longer-term yields and I don’t see any immediate weakening of the US dollar. So this doesn’t sound like an external environment within which emerging markets thrive. Of course, oil prices are weak and that helps a number of emerging markets including India but there is enough trouble through capital account and through traded accounts, trade conflict related broadly as to offset the beneficial effect of the weakening of oil prices for countries like India.

Since we spoke about Trump and Powell, RBI former governor Urjit Patel has resigned ostensibly protesting the government interfering with his banking regulations and other rules. Is this a worry at all for foreign investors that a governor had to resign on principles?

Getting to a situation where the governor of a central bank feels he has no option but to resign to underline emphasize and maintain as much as he can of central bank’s independence is not a good place to be. It may have short-term benefits in terms of more relaxed credit conditions, credit growth in the run up to the elections in 2019, but the country will pay a price for undermining of central bank independence yes, that seems inevitable.

Do you worry there will be more monetary and fiscal looseness because of this event and the new man in the mint street and will this monetary and fiscal looseness result in some financial instability later in 2019 or in 2020?

Certainly for the next five months until the elections, we are going to have an excessively loose fiscal policy and attempts to loosen monetary and credit policy as well. I think a price will be paid for that after the elections. But since the period between now and the elections is a relatively short one, the damage that can be done assuming that most of these handouts are going to be partially taken back following the elections, the damage need not be too serious.

2019 is important for us because of the general elections. We seem to have kicked off a capex growth but with this kind of a political economy backdrop what is your sense of the India growth story?

I think there should be a slowdown in the Indian economic growth simply because of the worsening external environment. This can be offset to some extent by a great fiscal stimulus and credit stimulus but that would lead to a more unbalanced economy, growing trade deficit and current account deficit and I think a price to be paid through the currency and through capital outflows. So I see for India too, a slowdown relative to 2018 certainly a more unbalanced economy.
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