RBI’s Next Move Will Be A Hike, Says Morgan Stanley’s Chetan Ahya
The RBI’s decision to cut the inflation forecast came as a ‘slight surprise’, Chetan Ahya said.
The Reserve Bank of India is done with rate cuts for the remainder of the year, according to Morgan Stanley’s Global co-Head of Economics, Chetan Ahya. Morgan Stanley is confident that growth in India will recover and inflation will rise, Ahya told BloombergQuint's Niraj Shah on the sidelines of the Morgan Stanley Annual India Summit.
The cut in the central bank's inflation forecast came as a 'slight suprise' but could be explained by the fall in food inflation in April and the impact of demonetisation, which likely took the RBI by surprise, he said. All told though, the policy statement was in line with expectations, Ahya added.
India's monetary policy committee on Wednesday voted to keep the key benchmark interest rates unchanged but softened its hawkish stance owing to a fall in retail inflation in April. Five of the six MPC members voted in favour of the decision.
At current levels, Morgan Stanley expects growth to accelerate and remain around 8 percent in second half of the calendar year while inflation is likely to normalise from the current 3 percent level, Ahya said.
Here are edited excerpts from the interview.
First reaction post the policy, surprised or not?
We expected the RBI to change the language on inflation outlook because of what the inflation data points were pointing out. So this is pretty much in line with our expectations.
It is not the monetary policy committee’s unanimous decision, Ravindra Dholakia differed from the rest and they have reduced the inflation rate forecasts dramatically for the first and the second half. Is that a surprise or you had expected this?
It is a slight surprise because we had expected them to change the inflation forecast number but they have changed more than what we had thought. That is probably because of the way inflation has panned out and the way food inflation numbers have been panning out. However, core inflation number is quite stable in the last few months, it is really food inflation which is not predictable. The other point is that the demonetisation impact is what has surprised them and in fact, us as well, which has probably made them change their inflation forecast.
Do they see potential upside risks, the fiscal deficit pressure that could come in due to the farm loan waiver, seventh pay commission could have its way as well. To your mind are these serious concerns which could have any kind of an impact on inflation? And could these have an impact before the August policy?
Some of it possibly yes. For example, we don’t know when exactly HRA for the Seventth Pay Commission will be announced. We don’t know what is going to happen to the monsoon season, it is just IMD’s forecast. IMD forecasts only the aggregate numbers and that is what we know right now. But in the end, how does the distribution work out, the impact of that on farm sector output is not known. The impact of demonetisation and how long it will persist is not known. So those are these uncertainties that they are pointing out. Rural wages have picked up and RBI governor mentioned that in the press meet too. So there are lot of uncertainties related to the inflation outlook. Therefore RBI has to wait to see if inflation stays lower for longer and then take the decision for the rate cut.
Would you believe that there is a higher probability that there could be some rate action on August 2? By then a large part of the monsoon season would be out of the way, the Fed meeting would be done by then.
It is not our base case. We don’t expect any rate cut now. We think that RBI is done in terms of rate cuts. For cuts to come through we will have to go wrong on our inflation and growth recovery forecast, which is possible. But right now, we are pretty confident that growth will recover and we believe that inflation will go up again. The headline inflation is one aspect of it, food inflation cannot be the only reason why RBI cuts interest rates. Right now it looks like the headline inflation is low. So when you say RBI changes the inflation forecast, if in reality, inflation stays low at 3 percent but it’s just because of food, then I’m not sure if RBI will get the confidence to cut interest rates in August. The chances of the core inflation coming down to a level, by August, such that a majority of voters in the MPC move to the other side and cut, appears low.
Despite the dovish commentary you probably believe that August is not the time?
Not in this cycle. The next move is possibly up rather than down. So, as they move towards their stance to neutral, we think RBI will keep rates stable because we do expect growth to recover and inflation to normalise from the current 3 percent level.
Your view is that inflation makes a comeback of sorts only in the second half of 2017-18 but growth could probably pick up slightly earlier. Is that the base case?
From current levels, we do expect inflation to first go to 4.5 percent in the last quarter of this calendar year and first quarter of 2018. We don’t expect inflation to go up above 5 percent. So, therefore if it’s 4.5 percent, it is still moderate inflation as growth picks up. And so it will be a favourable environment for investors.
And growth picks up in the second half of this fiscal?
The GDP data print it is from June 2017 quarter. We think that last quarter there were some statistical issues. For example, the GDP deflator was very high. That is already looking like, on the basis of WPI data, that it will come off and so that will help improve the growth numbers. But underlying economic activity also seems to be already picking up. If you look at two-wheeler sales, that’s picked up in April. For the month of May, our estimates based on conversations with the company, is that it’s going to be in double digits. So discretionary consumption is recovering, external demand…if you look at last two month, exports growth has been quite strong. Underline economic activity is already picking up in the June 2017 quarter.
Your team is extremely bullish on India both from an equity perspective and otherwise. You believe that economic indicators are also on track to support the momentum that the equity markets could show?
Yes, absolutely. We expect growth to continue to accelerate from June 2017 quarter and be in the range of around 8 percent in the second half of the calendar year.