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RBI policy surprised more than minutes of MPC: Jahangir Aziz

If one look at growth performance of India, the only real driver has unfortunately been oil prices.

ET Now|
Updated: Apr 20, 2018, 03.16 PM IST
ET Bureau
There is always a possibility that in the event of inflation surprising us very strongly, RBI could move fast than anticipated.
Jahangir Aziz of JP Morgan looks through RBI’s hawkish tone in minutes of policy review and its possible impact on the market. Excerpts from an interview with ETNow

Do you think RBI has turned hawkish in the minutes of the recent policy review compared with its previous dovish tone?

It would be an understatement, given that the vast majority of the MPC members had views quite contradictory to the language and tone of money policy review. We were probably more surprised by the policy review than minutes of the MPC meeting.

While they have said they may shift their stance to withdrawal of accommodation by June, do you think it is just a broad timeline that they have laid out to prepare the market? Does it mean if inflation rises more than anticipated, they could move even faster?

There is always a possibility that in the event of inflation surprising us very strongly, RBI could move faster than anticipated. But it is important to keep in mind that as a true inflation targeter, one is not too concerned about what has happened to inflation today or yesterday. What we are really concerned about is where is the inflation target 12 months ahead.

Keeping in mind how external factors such as oil prices are performing, unless something really surprising happens, RBI will probably not act aggressively and allow the rates to move steadily.

Why such a pull on the money market? Bond yields have risen considerably. They are at four-week high. The rupee is at a 13-month low. Besides concern of rising oil prices, what else is leading to these moves?

Since September last year, the macroeconomic dynamics were all growing in the wrong direction. Fiscal deficit of both the centre and states have widened sharply; current account deficit is heading towards a much wider current value over that of last two years. When an economy goes through such times of fundamental shift, it is hard to fight such forces, thereby leading to the current pull on the money market.

Do you think rising yields are signalling market volatility from the macro side ? Will rising inflation lead to tightening of liquidity conditions and, thereby, slow down growth revival?

If one looks at growth performance of India over last four-five years, the only real driver of growth has unfortunately been oil prices. If oil prices head north, the economy will be under great pressure. Secondly, we have had two disruptive policies i.e. demonetisation and GST, because of which while every other economy in the world benefitted from exports in 2016, India could not do the same. Both these factors are at play, and along with this, if you also throw in concerns over trade wars, etc, they always affect investment sentiments, and thus affect growth prospects.

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