If oil heads north, India will be under great pressure: JP Morgan

Talking to ETNow, Jahangir Aziz, Asia Economic Research, JP Morgan, talks about the RBI’s recent hawkish tone and its possible effects on the market.ET Now: In the recent RBI minutes meeting, do you think that the central bank has turned hawkish as compared to their previous dovish tone? Jahangir Aziz: It would be an understatement given that the vast majority of the MPC members had views quite contradictory to the language and tone of the monetary policy review. Also, I believe we were probably more surprised by the policy review than by the minutes of the MPC meeting.ET Now: So while they have said that they may shift their stance to withdrawal of accommodation by next June, do you think that that is also just a broad timeline that they have laid out to prepare the market? Also, does it mean that if inflation does edge higher, more than anticipated, then they could move even faster?Jahangir Aziz: There is always a possibility that in the event of inflation surprising us very strongly, RBI could move fast than anticipated, but here it is important to keep in mind that as a true inflation targeter, one is not much concerned about what has happened to inflation today or yesterday. What are we really concerned about is whether the inflation target is 12 months ahead. But keeping in mind, how external factors such as oil prices are performing, unless something really surprising happens, the RBI will probably will not act aggressively and allow the rates to move steadily. ET Now: Why such a pull on the money markets, the bond yields have risen considerably. They are at 4-week high. The rupee is at 13-month low. Besides the concern on rising oil prices, what is leading to these moves?Jahangir Aziz: Since September last year, the macroeconomic dynamics were all growing in the wrong direction. The fiscal deficit of both centre and the states have widened sharply, the current account deficit is heading towards a much wider current value over the last two years. So, when an economy goes through such times of fundamental shifts, it is very hard to fight against such forces, thereby leading to the current pull on the money market. ET Now: Do you think that rising yields are signalling towards market volatility coming in from the macro side ? Will the rising inflation lead to tightening of liquidity conditions and thereby slowing down the growth revival ?Jahangir Aziz: If one look at the growth performance of India over the last four-five years, the only real driver of growth in India has unfortunately been oil prices. And I think that if the oil prices head north, the economy will be under great pressure. Secondly, we have had two disruptive policy i.e..demonetisation and GST because of which while every other economy in the world in 2016 benefitted from the export, India could not do the same. Hence, both these factors are at play and alongwith this if you also throw in the concerns about trade wars, etc, they always affect the investment sentiments, thereby affecting the growth prospects for the next six to nine months.

from The Economic Times https://ift.tt/2HfCmOC