When nobody is ready to invest, interest rates become negative: Vallabh Bhanshali, Enam Group

In a chat with ET Now, Vallabh Bhanshali, Chairman, Enam Group, says central banks played that role for a few years but if all the reliance is placed on the central banks things will not work. Edited excerpts

ET Now: We are interacting with you at a time when it is difficult to gauge the general environment. We have seen crack in the month of February and March. We have seen a monster rally after that. In Feb, we were only discussing end of China, today we are discussing end of European Union. Why is world such a fickle place?

Vallabh Bhanshali: These are big waves that are always a part of our life. Some are not immediately evident but a tsunami builds up for many years before it strikes. There are primarily inequalities in the world that create waves, I think inequality in terms of political power, inequality in terms of financial power, the desire and ambition of people to bridge that gap, create the waves. Once you start bridging that gap, then you want to yourself become dominant. I do not want to mention names but you know what I am talking about and then you do not know how to create balance. So these forces have been at play for a while and then you have accompanying events like you had -- the Iraq war that created a rupture in the whole process. In that way, something unfortunate, artificial is created and then we never recover from it.

So politically, that area is not settled. The financial damage arising out of that has not really got settled. One thing has led to the next and we have managed to keep the show going and in the mean time we have seen much greater social inequality in the world and this will manifest in many-many ways. Technology is something which is so extraordinary because whatever good it brings and what difficulty it creates, are in the short term. In the long term it will probably do all good but in the short term, it also creates a lot of pain. Take for example, while we did recognise the depression causing or the deflation causing capability of the Chinese growth, technology is bringing down the prices of everything. It is removing inventory from everywhere. It is reducing redundancy that means my demand for so many things just going down and the whole price mechanism comes down. It is also deflationary. Now would we wish that we do not advance in technology? We do want to advance in technology because it improves life at so many levels. Economy measures are probably lagging behind, that today the advantage that I have of quickly getting on Whatsapp and communicating, I beat the difficulties of the networks, etc, how do I capture it and it is free. The value it has added is not captured anywhere. Therefore, there are many challenges that we are facing, that the world is getting better in many-many ways, the economic measures are lagging behind and then we are not capturing it. These differences in terms of wealth, in terms of various kinds of powers, we are not able to measure and therefore if you cannot measure, you cannot even solve it.

ET Now: But in general do you think the value of money seems to be coming down? Bond yields at a global level are at a record low. $10 trillion of cash is lying in yields which are giving no returns. The world optically is hungry for growth but the desire to invest is just not there or desire to take risk is not there?

Vallabh Bhanshali: You are seeing the same thing. These are the two sides of the same coin. When nobody is ready to invest that is when the interest rates become negative. You lower interest rates to incentivise investment and you have lowered them to the extent of now taking them to the negative zone. People do not want to invest and therefore it becomes a vicious circle that lowers the interest rates. Once this kind of message goes out, things are extremely uncertain. Hang on to your money. Even if you have to pay for it and that becomes even more difficult and this I think is some extent the politics lagging behind, statistics and economies lagging behind and therefore we have this absurd kind of situation.

As a matter of fact, at the last Berskshire Hathway meeting Mr Buffett was asked this question pointedly. He says the fact that we have negative interest rates and therefore there is no risk of free return and you are always known to be a fundamentalist player. If you buy a business, you will measure the value based on the risk free return so how did you do it, how did you value the company? The answer did not come forth immediately for whatever reason but that he did answer, he says the result I had to pay a higher price. So you have to impute an equity value, you have to impute a risk free return, the risk free return cannot today, cannot be measured in what was traditionally risk free bonds that risk free return is something else today. People see risk in the treasury bond and therefore they are not even using this as a benchmark and that is why he said that net-net I probably paid a higher price because I had to look further risk free return. So these are the measuring tools that seem to have become legacies and we need new tools.

ET Now: So what else can the central bank do apart from just dropping money in negative interest rates is perhaps a new experiment something which we (26:27) financial history we do not know whether this will succeed or not but I guess this is the maximum they can go to?

Vallabh Bhanshali: Indeed because no element or no part of society is complete and omnipotent. It has to work with others for any given moment one tool or one institution will play a great role. Central banks played that role for a few years but if all the reliance is placed on the central banks things will not work for example for last few years people already talking about monetary policy is done and overdone let us move to fiscal policy and…