Bringing inflation down will help growth: JPMorgan

However, Chinoy said governor Rajan has made it amply clear that there may be further tightening if any of the macro variables change - either the fisc goes off track or the currency comes under pressure or growth picks up, among others. But the “focus really should be on the change in shift and the fact that at these levels of inflation there really is no trade-off anymore between growth and inflation,” he told CNBC-TV18.

Chinoy said Rajan infact believes that bringing inflation down will help growth. Rajan went on to say that the current inflation level is squeezing purchasing power and that is affecting consumption. At these levels of inflation even deposit rates have very little room to come down.

Below is the verbatim transcript of Sajjid Z Chinoy & Tirthankar Patnaik's interview with Ekta Batra on CNBC-TV18

Ekta: What have you made of the governor's statements in the press conference, especially indicating that it was a close call and a decision which they acted upon today?

Patnaik: Governor clearly clarified how important inflation is to their entire policy exercise. Inflation remains at the core and center of things. One takeaway we had was that in addition to highlighting that further rate hikes may not be required at the near juncture, he also pointed out in the conference that I think we have done enough that needed to be done for inflation control in the near-term. We would take that as a positive that while the RBI has sort of succeeded in hammering home worries about inflation and therefore would be very great for inflationary expectations we do not see rates going up really, not too much now.

Ekta: One of the statements which were mentioned said that the steps which we think we have taken will take us to where we want to go which I assume would be the 8 percent target of CPI by the year end. Do you think that then for this entire calendar year at least we would be safe from any more repo rate hikes?

Chinoy: A couple of things to note. We can get lost in the details of what may happen next month or the month after, but I think what was implicit today is there has been a new regime and there is more transparency, there is more creditability, there is more of a rule based approach where now all of us know what the RBI is looking at a year from now.

The idea is, very clearly they are going to look at 8 percent CPI inflation and so I think that injects a level of certainty that did not exist before where nobody quite knew whether it was growth, inflation, exchange rate, whether it was headline inflation or core inflation, so I think that is an important institutional change today that we all know that the headline CPI at 8 percent is where the central bank would like to go and they need to get enormous bouquets for moving in that direction.

As the governor rightly pointed out there are lots of moving pieces in the next year. One will have to see what happens to growth? Is there a second half recovery in growth? Is the fiscal consolidation on track later in the year? What happens to the currency? So I think there are lots of things that can potentially move. What the RBI has said is as of now, after this rate hike their forecast one year from now makes the risks balanced and they do not see the need to do anything more, but if any of these other variables change, either the fisc goes off track or the currency comes under pressure or growth picks up and pricing power picks up and therefore inflation picks up it is entirely possible later in the year you could see more tightening, but I think the focus really should be on the change in shift and the fact that at these levels of inflation there really is not a trade-off anymore between growth and inflation.

Ekta: We have not seen the markets react too much. There was a marginal downtick that we saw and it stabilised with that cut of around three tens of a percent. How did you read the reaction of the markets and would you be a buyer on dips at this point?

Patnaik: I would answer the second part of your question first. We obviously are not buyers of financials. We remain cautious on market fundamentals. IT and pharma are our overweights. Financials remain our underweight. What happened in the near-term could be summed up this way that initially there was a negative surprise with the rate hike. Large part of the market was expecting the central bank to maintain a pause, so there was a negative surprise, but when the commentary turned out to be that not much is required in the near-term I guess the markets took it in a positive sense.

Ekta: Where do you think RBI is placed on growth?

Chinoy: I think what was interesting to note today and this came through in the governor's press conference a few times is the RBI believes that when inflation is at 10 percent there is no trade-off. It is not like bringing inflation down is going to hurt growth. I think they believe if you bring inflation down it will help growth. The governor made two or three interesting points that at these levels of inflation it is squeezing purchasing power and that has affected consumption. At these levels of inflation deposit rates have very little room to come down. So they believe if inflation comes down that is going to be growth enhancing, not growth inhibiting.

Ekta: April 1st is the next policy by the RBI. Is it then going to be data dependent if we have core which inches up but the headline inflation which stays lower because of cooling vegetable prices. Will there be an action from the RBI or will they wait and watch till the end of the year or maybe a little later?

Chinoy: I think at each point they will update their forecast. My own sense over the next three months is with food prices correcting and with the economy going through a pretty sharp fiscal squeeze over the next three months where expenditure is really compressed to meet the fiscal deficit target, both those forces should provide some disinflationary bias. Our own forecast tends to go lower over the next 2-3 months. Given what we know now I would expect the RBI to be on hold in April. What happens in second, third and fourth quarter as we discussed depends on a host of other variables.