India can withstand a tight monetary policy: Morgan Stanley

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As we are approaching monetary policy review on July 27, experts and investors are divided if Reserve Bank of India (RBI) is up for a rate hike.

In an exclusive interview to CNBC-TV18, Chetan Ahya, Managing Director of Morgan Stanley says that right now RBI may not opt for tightening of monetary policy. Being bullish on India, he says that Indian economy can, however, absorb a tight monetary policy.

According to Ahya, RBI needs to hike repo rate if liquidity is injected.

On the ever-increasing inflation he says that headline inflation may ease if there is a normal monsoon.

Here is a verbatim transcript of the exclusive interview with Chetan Ahya on CNBC-TV18. Also watch the accompanying video.

Q: The concern that arose after the inflation numbers, any inter-meeting move coming you think?

A: I think the Central Bank should be doing policy rate hike soon. But considering the fact that there has already been some kind of automatic tightening because of the outflows on account of 3G and BWA, there is a possibility that they might wait for some more time and not aggravate the tightening, which is already happening in the system right now.

Q: On that a lot of people contend that a CRR (cash reserve ratio) hike might be out of the question, but a rate signal may not be completely ruled out, what do you think?

A: Yes, if there is any action on Friday in terms of injecting liquidity by way of either an additional temporary 0.5% SLR (statutory liquidity ratio) or some other route, which RBI may choose to ensure that there is adequate liquidity because even the BWA license fees were quite big and there is advance tax on top of it, the government is continuing with its borrowing programme. So there is a possibility they may do some temporary liquidity injection. In that case, I think it might be worthwhile to do then repo rate at the same time, otherwise the message will be that inflation is going up and the Central Bank is injecting more liquidity. So if they choose to inject more liquidity then the repo rate hike would probably become more likely on this Friday itself.