Surprised by the Reserve Bank’s move of keeping the key rates unchanged in its mid-monetary policy review on Wednesday, Jahangir Aziz, chief economist, JPMorgan believes the RBI is in denial and ceases to learn from past. According to him, the move by the RBI is similar to that in 2011, when the central bank was trying to catch up with what it should have done in six months back.
According to CNBC-TV18’s poll, the RBI was expected to hike repo rate by 25 bps.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: JP Morgan in India at least said that there was an outside chance of 50 bps. Would this come as an RBI behind the curve to you?
A: Absolutely. Four years have gone by, we have had double digit inflation almost throughout that four year period and we still talk about supply shocks, we still have RBI in denial, refusing to learn from the past. I think we are setting ourselves up for another round of trying to catch up with the inflation. This will again be something like the first half of 2011, where we are trying to catch up with what we should have done six months back.
Q: How will inflation pan out going ahead?
A: If you forget about food inflation, I am sure that everybody has a view on how much prices are going to fall in the month of December. Core inflation was running on a quarterly momentum of about 1 percent annualised, not too long ago but three-four months back. It is now running at 7.5-8 percent core inflation momentum and this is with growth at 4.5 percent. Imagine what will happen if we all get our wishes right and we do have an investment boom taking place in the second half of the year. With this kind of momentum going through, I wonder what might happen to inflation in the second half of the year.
There isn’t any indicator on the core side either if you look at upward gap or if you look at purchasing managers' index (PMI) numbers that suggest a significant cooling down of core inflation. Again, food inflation will do what it has to and is going to be very temporary.
Q: Do you mean this is not the last hike or there is one more hike before the end of the fiscal?
A: I am really surprised that there wasn’t a hike and I am really surprised that the governor chose to not take early action and wait for food inflation to come down. This is because he can see the core inflation numbers really spiking up on a quarterly momentum even from three months back. So, I am really surprised that this happened and my guess is that we will be playing catch up in the first half of the year.
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