RBI Needs To Raise Rates More Aggressively: JPMorgan’s Jahangir Aziz
Macroeconomic stability needs to govern what the RBI does, JPMorgan's Jahangir Aziz says, pitching for aggressive repo rate hikes.
Macroeconomic stability needs to govern what the Reserve Bank of India needs to do. As such, the central bank needs to raise rates more aggressively, according to Jahangir Aziz.
There’s a debate around monetary policy right now. Whether the RBI should hike by 35 basis points or 50 basis points or where the terminal rate is, said the head-EM economics research and commodities at JPMorgan.
There’s the usual debate over the trade-off between growth and inflation. That trade-off is false and that’s not where the RBI or monetary policy should be focused on right now, he said in an interview to BQ Prime on the sidelines of JPMorgan India Investor Summit on Tuesday. “While we are all debating about whether inflation is the problem or growth is the problem, one need to look at the old problem—India’s twin deficits, which has always been India’s Achilles’ heel.”
States and central deficits is probably going to be at 11.5-12% of the GDP. But far more worrying is that current account deficit is hitting 4% of the GDP, Aziz said. “The last time we had this combination was back in 2013. Where a whisper that the Fed would tighten monetary policy created the taper tantrum, the Fed now is doing quantitative easing and is raising rates.”
The RBI has been talking about frontloading. But it needs to signal that it’s worried about the current account, about what is happening to the fiscal deficit and about the fact that global financial conditions have not only tightened but are most likely to tighten further, Aziz said.
“If Euro area growth is going to weaken and U.S. growth is going to do better, then the growth differential between the Fed and the ECB is going to widen, and chances are we are going to see further strengthening of the dollar,” he said. “That’s not very good for India. The RBI should talk about that.”
Macro policy and particularly monetary and fiscal policy, according to Aziz, should not get sidetracked into worrying about inflation. “India’s problem right now is to ensure that there is macroeconomic stability because we have reached that point where traditionally India becomes very vulnerable with CAD beyond 2.5% of the GDP and double-digit fiscal deficit.”
“While one can point to the level of forex reserves, it is not the level that matters but the burn rate that matters.” The central bank has already intervened with about $80 billion to defend the rupee.
The Monetary Policy Committee’s next resolution is scheduled for Sept. 30, 2022. “We think the Federal Open Market Committee, set to announce its decision on Wednesday, is likely to hike rates by 75 basis points, with a 100-basis-point hike being out of character.”
“While markets are also pricing in a 75-basis-point hike, what they might be pricing in is the indication of what might happen in November, December and more importantly in 2023,” Aziz said.
Watch the full interview here: