ET NowIn a chat with ET Now, Jahangir Aziz, Head of Emerging Asia Economics, JP Morgan, shares his views on the RBI credit policy. Excerpts:
ET Now: Why do not you jump in with your initial thoughts? First we came to you when the headline flash was out, but by now I am sure you must have made up your mind looking at the final print?
Jahangir Aziz: He (Rajan) is not going overboard with where growth will rise, he is talking in terms of that there is a cyclical lift that will take place in the economy given where the economy stands. As long as that cycle does not end up blowing up inflation, he is going to keep rates broadly unchanged in the near term. He is holding hands of the investors, saying that do not worry, I am not going to surprise you again as long as the data does not surprise me.
ET Now: But the bottom line is that ultimately what will happen to policy in this calendar year. So how do you see policy outlook shaping over CY2014 and do you see further hikes or a prolonged pause by the RBI irrespective of the government mandate?
Jahangir Aziz: We do not see inflation as a supply-side phenomenon. We continue to believe, as we have done for the last four years, that inflation in India is mostly a demand-side phenomenon where demand has outstripped supply.
Our sense therefore is that if indeed India sees in the second half of this year any reasonable lift coming out of the investment or consumption, so that growth breaks away from the 4%-5% range to the 6%, 7% or 8% range, then the core inflation being very stubborn, very sticky at 8% could easily go into double digits and even higher. So as far as we are concerned, we do see a significant turnaround in inflation in the second half of the fiscal year and therefore we have about two rate hikes for the second half of the year.
Now that admittedly is a completely out of consensus call, but we think at the minimum, India will see 50-bps higher policy rates by the end of fiscal year.
ET Now: Why do not you jump in with your initial thoughts? First we came to you when the headline flash was out, but by now I am sure you must have made up your mind looking at the final print?
Jahangir Aziz: He (Rajan) is not going overboard with where growth will rise, he is talking in terms of that there is a cyclical lift that will take place in the economy given where the economy stands. As long as that cycle does not end up blowing up inflation, he is going to keep rates broadly unchanged in the near term. He is holding hands of the investors, saying that do not worry, I am not going to surprise you again as long as the data does not surprise me.
ET Now: But the bottom line is that ultimately what will happen to policy in this calendar year. So how do you see policy outlook shaping over CY2014 and do you see further hikes or a prolonged pause by the RBI irrespective of the government mandate?
Jahangir Aziz: We do not see inflation as a supply-side phenomenon. We continue to believe, as we have done for the last four years, that inflation in India is mostly a demand-side phenomenon where demand has outstripped supply.
Our sense therefore is that if indeed India sees in the second half of this year any reasonable lift coming out of the investment or consumption, so that growth breaks away from the 4%-5% range to the 6%, 7% or 8% range, then the core inflation being very stubborn, very sticky at 8% could easily go into double digits and even higher. So as far as we are concerned, we do see a significant turnaround in inflation in the second half of the fiscal year and therefore we have about two rate hikes for the second half of the year.
Now that admittedly is a completely out of consensus call, but we think at the minimum, India will see 50-bps higher policy rates by the end of fiscal year.
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