ET Now
In a chat with ET Now, Saugata Bhattacharya, Economist, Axis Bank, shares his views on the US Fed keeping the rates on hold. Excerpts:
ET Now: The US Fed has decided to stay course. How should one read into that because if the US Fed has indicated that they will not increase interest rates in the short term, does that mean that they are worried about the progress of the US economy?
Saugata Bhattacharya: We are seeing the signs of recovery. Various employment and growth indicators show that the situation is much better than what it was about six months back. But while there is still some optimism on the job markets despite the interpretations of the various numbers that have come in, we have seen a drawback in the growth forecast for the US.
Inflation is nowhere close to the Fed’s target of 2%. So it is safe to say that the next set of actions will be very data-intensive.
They will be very cautious in trying to raise rates because a large part of the US economy is based on the mortgage industry and if there is an increase in the Fed’s FFR, it has an immediate impact on the mortgage rates. An increase of one basis point in mortgage rates probably has an impact of about $50 billion odd.
ET Now: Irrespective of what the US Fed could do and should do and does in the next year or so, do you think for the moment we could be staring at abundant liquidity because BoJ is in a mood to follow a loose monetary policy, and the ECB President Mario Draghi also has indicated that he will do whatever it takes to fix Europe.
Saugata Bhattacharya: Draghi will be a little bit more cautious, but there is absolutely no way that they will begin to tighten their stance anytime in the near future. They will probably do some reflation.
Even more than that, China has turned down the spigot. You have just seen that they have put out $500 billion Yuan rmb for banks, that is higher than $81 billion.
It basically now depends on what the emerging markets do. Fortunately, India is in a very good position now in comparison with many other emerging market peers.
ET Now: While the Fed has said that it is going to be a considerable time before they hike interest rates, what is the view that you are getting about India? We also have a policy lined up towards the end of the month. Does it seem like it is going to be a status quo or do you think we may just get a surprise rate cut or is it not a possibility right now looking at the inflation numbers?
Saugata Bhattacharya: The inflation numbers are looking quite benign. Even the CPI inflation numbers, which came out fairly high, will begin to go down.
I do not really think that there is any chance of a rate cut in the September policy. I am of the view that you will see a drop in inflation over the next four or five months, but it will begin to climb up beyond that.
I am actually quite sure that we may meet the first milestone for the Reserve Bank, ie, 8% by January, but then it depends on how the growth impulses in India impact the wage cost. So it remains to be seen how the core inflation numbers begin to pan out.
ET Now: For the moment, it is the strength in the dollar index, not the fundamentals of the Indian economy, which are injecting some volatility and weakness in the currency. Do you think the Reserve Bank of India should step in? They are now sitting on a lot of reserves and FDI flows, and portfolio flows are also on our side.
Saugata Bhattacharya: We have got a significant amount of money in the last three or four months. Huge amounts of FDI, which is about $40 billion for this year. But the Reserve Bank will probably come in and prevent volatility in the markets.
We do believe that they have used their forward positions, they have intervened in the forward markets to stem volatility. But as far as directions go, it does look as if both the government and the Reserve Bank will be comfortable with a slow and steady depreciation of the rupee in the near future because exports are a big growth driver for the economy at this point in time.
I am not very sure how will things look if the rupee begins to strengthen. There are risks to this view that if at some point of time next year you get a ratings upgrade for India, you will probably get a ratings outlook upgrade soon. On top of that, a full ratings upgrade, which is now warranted for India, will bring in a huge amount of funds into India and how the Reserve Bank deals with that will determine the course of the rupee.
ET Now: The US Fed has decided to stay course. How should one read into that because if the US Fed has indicated that they will not increase interest rates in the short term, does that mean that they are worried about the progress of the US economy?
Saugata Bhattacharya: We are seeing the signs of recovery. Various employment and growth indicators show that the situation is much better than what it was about six months back. But while there is still some optimism on the job markets despite the interpretations of the various numbers that have come in, we have seen a drawback in the growth forecast for the US.
Inflation is nowhere close to the Fed’s target of 2%. So it is safe to say that the next set of actions will be very data-intensive.
They will be very cautious in trying to raise rates because a large part of the US economy is based on the mortgage industry and if there is an increase in the Fed’s FFR, it has an immediate impact on the mortgage rates. An increase of one basis point in mortgage rates probably has an impact of about $50 billion odd.
ET Now: Irrespective of what the US Fed could do and should do and does in the next year or so, do you think for the moment we could be staring at abundant liquidity because BoJ is in a mood to follow a loose monetary policy, and the ECB President Mario Draghi also has indicated that he will do whatever it takes to fix Europe.
Saugata Bhattacharya: Draghi will be a little bit more cautious, but there is absolutely no way that they will begin to tighten their stance anytime in the near future. They will probably do some reflation.
Even more than that, China has turned down the spigot. You have just seen that they have put out $500 billion Yuan rmb for banks, that is higher than $81 billion.
It basically now depends on what the emerging markets do. Fortunately, India is in a very good position now in comparison with many other emerging market peers.
ET Now: While the Fed has said that it is going to be a considerable time before they hike interest rates, what is the view that you are getting about India? We also have a policy lined up towards the end of the month. Does it seem like it is going to be a status quo or do you think we may just get a surprise rate cut or is it not a possibility right now looking at the inflation numbers?
Saugata Bhattacharya: The inflation numbers are looking quite benign. Even the CPI inflation numbers, which came out fairly high, will begin to go down.
I do not really think that there is any chance of a rate cut in the September policy. I am of the view that you will see a drop in inflation over the next four or five months, but it will begin to climb up beyond that.
I am actually quite sure that we may meet the first milestone for the Reserve Bank, ie, 8% by January, but then it depends on how the growth impulses in India impact the wage cost. So it remains to be seen how the core inflation numbers begin to pan out.
Saugata Bhattacharya: We have got a significant amount of money in the last three or four months. Huge amounts of FDI, which is about $40 billion for this year. But the Reserve Bank will probably come in and prevent volatility in the markets.
We do believe that they have used their forward positions, they have intervened in the forward markets to stem volatility. But as far as directions go, it does look as if both the government and the Reserve Bank will be comfortable with a slow and steady depreciation of the rupee in the near future because exports are a big growth driver for the economy at this point in time.
I am not very sure how will things look if the rupee begins to strengthen. There are risks to this view that if at some point of time next year you get a ratings upgrade for India, you will probably get a ratings outlook upgrade soon. On top of that, a full ratings upgrade, which is now warranted for India, will bring in a huge amount of funds into India and how the Reserve Bank deals with that will determine the course of the rupee.
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