The safe haven at this point is dollar and its strength is increasing: Jahangir Aziz, JPMorgan

In a chat with ET Now, Jahangir Aziz, Chief Economist, JPMorgan, says one does not know if this dollar strength increase is permanent or simply something that allows us to get over the next few months till the world returns some formal normalcy. Edited excerpts

ET Now: So much of opinion is floating around that it is hard to find out what is right and what is wrong. What is your view?

Jahangir Aziz: Again the short-term impact of Brexit is basically the significant increase in uncertainty that has taken place and that has been reflected in dollar strength, in gold prices moving up etc. etc. This has also been reflected in people are moving out of risky assets or any assets for that matter into the safer assets including cash. The rise in uncertainty is the one that is very difficult to deal with and as a result we really need to find clarity in the next six to nine months on a) what does it actually mean for UK to exit and what will be the fall out in the other countries in European Union and b) how the rest of the world and in particular the central banks react to this increase uncertainty in the coming months.

ET Now: Do you think that the impact could be very grave and even if that were to be the case which is a bit uncertain right now, it is within the ambit of either the central bankers or the government to cushion any potential impact with monetary policies or otherwise do you think that will happen because everybody is talking about that right now?

Jahangir Aziz: Again that is the short term in fact and that is the impact that comes about in reaction to financial markets which are themselves reacting to this uncertainty. But there is a much bigger question which is what happens when the exit actually happens? What happens when other European Union members react to it and that calls for structural changes in the way we have been doing business over the last 25-30 years. It might even effect trade agreements, cross border financial flows, cross border labour market flows etc. Those are the big ones and I do not think that we have enough clarity on that. I do not really think monetary policy can do very much on buffering the economies against those structural changes.

ET Now: So where does India lie in the pack of cards right now barring that kneejerk reaction? What do you think is more important for India? Is it back to domestic dynamics like the intensity of monsoon, corporate earnings and tracking who is going to fill in Raghuram Rajan’s shoes at the central bank, going to be important again?

Jahangir Aziz: I would say yes, I would say that look beyond the very near term where we could see continued impact for volatility coming from global financial markets and bilateral exchange rate shifts. You have really no idea how that volatility will change and the Reserve Bank of India has enough ammunition to buffer the economy against that in the very near term. As you pointed out, I think the bigger question is what happens to the monetary policy framework? What happens for example to the FRBM Working Committee Recommendations? What do they recommend and how does the macroeconomic framework which we had some sense over the last few years how does that change in the coming six to nine months? That plays a much bigger role in determining where we are in the Indian economic cycle or the policy cycle then I would think that just the volatility coming out of Brexit.

ET Now: So till the time there is no clarity and if the winter is going to be long, who will be the eventual gainer? As of now money is flogging back into gold and into US dollar now the last thing US Fed wants is that they wants the dollar to strengthen because that will hurt their economic growth that will hurt their exports so every central banker is committed to print money, they want to bring the currency down and there is no demand everybody is hoping that global demand will compact so it is a very confusing scenario sort to speak?

Jahangir Aziz: Well that is usually what happens when there is a rise in global uncertainty and move to safe haven. Unfortunately the safe haven is at this point in time the US Treasuries and there is going to be the associated increase in dollar strength. The question is: is this dollar strength increase permanent or is this simply something that allows us to get over the next few months and the world returns some formal normalcy? In a structural format, the European Union was an important trading block which has now broken down. We can see further distress in the European Union. If these are structural changes, then necessarily these need to be reflected in structural valuation of assets in these economies i.e. bonds and forex and we cannot get away from it. But I would say that in the world where uncertainty rises, there are very few winners apart from safe haven that would mean mean what the people who own the safe haven assets actually want.