The hot topic in global markets for many days has been the dollar carry trade.

Economists around the world have been apprehensive of how the dollar carry trade is driving up asset classes around the world and whether emerging economies such as India need to impose any kind of capital controls. Carry trade involves transactions in which investors borrow in a low interest currency and use the money to invest in higher-yielding assets in other countries. In India, the stock market has doubled since March. Experts such as Housing Development Finance Corp. Ltd (HDFC) chairman Deepak Parekh fear that an asset bubble may be in the making. In an interview, Parekh spoke on the dollar carry trade, how long the dollar was expected to remain weak, the impact that would have on asset prices, and the outlook for interest rates. Edited excerpts:

How long do you expect the dollar to remain weak and what impact would that have on asset prices hereon?

Rate outlook: HDFC chairman Deepak Parekh says interest rates will remain more or less flat in the next six months or so. PTI

Hard infrastructure (growth) is still not happening, otherwise credit growth should not be so low. Credit growth in these six months is the biggest concern I have. It is one of the few six months where the deposit growth is almost twice the credit growth, which has never happened... That is not a good sign.

You talk to the infrastructure companies, Larsen and Toubro or Siemens, all these companies, they say order books are full, order books are high but lifting is not happening. So we are not building new steel plants fast, we have not started building cements plants. Ultra mega power plants are going very slowly due to bureaucratic reasons; tying up loose ends. Tying up of loose ends takes years, not months but years. That will be our downfall if we do not change.

What is the point of having cheap money accessible to huge amount of foreign funds when you can’t build a steel plant? The Tatas have been trying to build a steel plant in Orissa for how many years. Three steel plants can come up in that time. We do not have the luxury to wait and someone should realize that this is not the way to go about.

Are you worried about what the dollar carry trade inflow will mean if we are not able to absorb it in a truly constructive fashion? If we are not able to absorb it, do we need to look at other ways of stemming this inflow?

Money will go wherever they see reasonable returns. Money will go wherever there is safety. India is a safe country to invest and India will give returns. Look at what has happened in Brazil. They put a capital tax when you invest because they had a similar problem. We are more or less at the same level. Huge amount of inflows went into Brazil. Two-three months ago they put a capital tax. The inflow into Brazil has not slowed, because people have surplus money, people have to invest. Where do you invest? They are willing to pay the tax and invest.

If you check the Brazilian inflow has slowed down marginally. That is all. So even if you put capital controls or put caps or something you will also find, unless you want to insulate yourself and become a domesticated inward looking economy, you have to face it.

What is it that the economy is facing?

Asset bubbles like real estate, stock market bubble, too much money in futures and exchange, and too much money on derivative transactions. So there are risks involved. People who are doing that have to live with the risks.

Are you saying that there is very little that we can do to be able to regulate it then?

No, it is a pity that we are unable to use the money... We are a capital-starved country.

If we are able to move growth up to, let us say, around 7% levels next year, do you think some of this money will be efficiently, constructively deployed?

I am sure they can be. Just build roads.

But you are not seeing signs of it as yet?

I do not see signs. Just build roads across the country, that will bring economic development.

How do you see the next six months working out in terms of interest rates?

I think the interest rates are stable today. Chances of going down are limited. I would say that chances of marginally increasing are there because of inflationary pressures, not because of liquidity issues. There is still enormous liquidity in the system. So technically rates should not go up and may not even go up in the next six months because you still see around Rs1 lakh crore every day in reverse repo and that is not the only surplus money banks are having.

Banks invest in higher SLR (statutory liquidity ratio, or investment in government bonds and approved securities) than mandatorily required. Banks have money in mutual funds which are temporarily parked in liquid funds. So you have to take a combination of all that to see what is the surplus money in the system.

So I feel that in the next six months or so, interest rates will more or less remain flat. If at all they have to be increased they will be marginal, half a percent or so, not more.

Not pressurized a little more by inflation, fuelled by all this liquidity supply?

Even then I do not think that they can go up significantly because the demand pick-up is still slow. If the credit growth is twice the speed of deposit growth maybe you will see a little larger impact on interest rates. But at the moment I do not see interest rates going up in the first quarter.

The credit growth is poor only because companies are not investing as fast as they need to in asset building right now?

Not investing. Yes.

Any reason why—is it because we are just about finishing the process of inventory restocking as people called it? We are still waiting for demand on the ground to pick up. Is that what companies are telling you?

I do not think so. Companies are not saying that. Companies are saying that we are not yet getting our act together, getting all permissions to start a large project.