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economy | IST

RBI to face the heat if US Fed starts raising rates by June; 7% growth may be a stretch: Jahangir Aziz

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Central banks across the globe have been giving mixed signals. In the US and Europe, the central banks are hawkish but there is a rate cut from the central bank in China, which is indicating some loosening in Asia. To understand where does India figure amid all this, CNBC-TV18's Latha Venkatesh spoke to Jahangir Aziz, Head- Emerging Markets Economics Research and Commodities at JPMorgan.

Central banks across the globe have been giving mixed signals. In the US and Europe, the central banks are hawkish, while the central bank of China has undertaken a rate cut, which in turn is indicative of some loosening in Asia. To understand where India figures amid all this, CNBC-TV18's Latha Venkatesh spoke to Jahangir Aziz, Head- Emerging Markets Economics Research and Commodities at JPMorgan.
Aziz believes there is some space for India to remain easy. However the Reserve Bank of India (RBI) might be under pressure if the US Fed begins raising rates by June.
He said, "I think there is some space for India to remain easy. But if in June, the Fed starts raising rates that will clearly put pressure on the RBI to respond - may not be to the full extent – but somewhat."
Aziz believes the pressure on India is likely to be less if the 10-year yield remains stable and is not disrupted. He said, "More importantly, I think what really drives central banks with current account deficits to raise rates are two factors - one is what happens to the 10 year rate, because that's the funding currency for capital flows and what happens to the dollar. If the 10-year yield remains well behaved and doesn't become an anchor, I think the pressures on India will be much less."
He added, "Clearly the bigger factor, even more than the 10-year rate, is what will happen to the dollar. If the dollar strength is not disruptive again, I think India will have the space. But it's not an infinite space."
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As far as the US is concerned, Aziz is of the opinion that the Fed will begin tapering by March. He stated that central banks of developed markets are normalizing and are being led by the US Fed. He expects the lift-off to be gradual in June.
"Developed markets' central banks are normalizing, led by the Fed, UK is just shortly behind them. The tapering will be done by March and we are expecting from June onwards a lift-off. But the lift-off is going to be very gradual, we are just expecting a 25 basis points rate hike, one per quarter," he said.
He is of the opinion that inflation at the moment is being underestimated. The risks to inflation may come from Omicron and disruptive oil price movement.
On GDP, Aziz believes 7 percent growth for India is quite a bit of a stretch. He explained that the permanent damage of COVID-19 has been underestimated. He estimates that the Central and state government fiscal deficit will likely be at 10.8-11 percent of GDP.
He mentioned, "My guess is that 7 percent will be a stretch because what we are not taking into account is the fact that this virus necessarily has done permanent damage and long-term scarring to labour market participation, balance sheets of SMEs, balance sheets of household sectors and without any kind of material income support coming from the government, we are going to face headwinds coming from that."
"This permanent damage is being seriously underestimated. The deficit that we are seeing is because the government being central and state government together is running at 10.8-11 percent of GDP fiscal deficit," he explained.
Watch the video for the full interview.