Risk has had uneven impact on growth & inflation: HSBC

Leif Eskesen, Chief Economist for ASEAN and India from HSBC, in an interview with CNBC-TV18's Mitali Mukherjee and Udayan Mukherjee, gave his perspective and views on the much awaited RBI's policy announcement.

Below is the transcript of the interview. Q: What is your expectation today? What are your year end expectations pegged at both on the repo and reverse?
A: It is a very compelling case at the moment for a 50 basis point rate hikes. Over the last few months, the demand lead price pressures have been taking over as the key drivers of inflation in the economy. This is a testament of the strong underline growth in the economy that is allowing corporates to pass on the high input cost easily to the end consumers as well.
It is generally a reflection of the tight capacity in the economy. Having seen this shift towards demand price pressures to conflation shooting up, is the reason why we think RBI would be more adamant to address these inflation problems more head on.
The liquidity situations in the markets have eased as well. With inflation having a surprise on continuous basis now, it is important for RBI to do a more aggressive hike to send a strong signal on addressing this inflation problem practically. This will ultimately help better anchor inflation expectations.
If they do only 25 and continue the gradual approach, they will end up further behind the curve. This will ultimately result in inflation rising even further. This could be more growth destructive at the end of the day, than a more aggressive move right now. Q: The counter argument for people who believe that there should not be a 50 basis point hike this time is that it will do little to dampen actual WPI inflation and might end up crippling growth, which might turn out to be a problem six-nine months down the line. What is your take on that assessment?
A: We have seen this shift in what is driving inflation now. Earlier, a lot of it was related to food and sense supply side factors as well. We have seen more reason in recent months that demand side pressures are building up inflation. This is a key difference.
RBI has made some points in the past that during the time, where inflation was primarily driven by supply side factors, being more aggressive in their view.
Risk has had a disproportionate impact on growth and a little impact on inflation. It is demand side that is strong and keeping up inflation. We need look at addressing inflation more head on. For the complete story, watch the accompanying videos.