Chetan Ahya, Managing Director and Chief Economist at Morgan Stanley, shares insights on India’s economic outlook, potential risks, and monetary policy.
Q1: What is your outlook for India’s third-quarter growth, and what are the potential risks?
We anticipate a 6 percent GDP growth in the next quarter, 6.4 percent for the full fiscal year ending in March 2024, and 6.5 percent for the following financial year. There are two key risks we are monitoring. First, oil prices – geopolitical tensions pushing oil prices higher could impact India’s current account deficit, inflation, and investor sentiment. If oil exceeds $110 per barrel, it could lead to currency depreciation and upward inflation pressure.
The second risk involves political events. If the May 2024 elections result in a coalition-style government, it may significantly affect India’s growth outlook and private investment sentiment.
Q2: Will the RBI determine its policy based on its CPI inflation threshold rather than the target rate?
The RBI aims to bring inflation down to 4%. However, they don’t want to sacrifice significant growth and employment to achieve this goal rapidly. Like central banks worldwide, they understand the need for a patient approach. Supply shocks due to COVID and geopolitical factors caused inflation to rise. The RBI has chosen a more measured approach rather than aggressively curbing supply-side inflation to maintain growth and demand.
Q3: Where does India stand among Asian economies regarding growth and vulnerabilities?
India is positioned favorably among emerging markets and even compared to developed markets. It boasts high growth rates and doesn’t face major macroeconomic stability issues in terms of inflation or the current account balance.
India offers an attractive opportunity for investors with its potential for nominal GDP growth of 10-11 percent. This backdrop supports corporate sector profitability and has attracted significant investor interest.
Q4: Should the interest rate differential between the US and India narrow? What if the RBI has to follow the US rate trajectory?
The gap in nominal interest rates between the US and India has significantly decreased. While the real rate gap remains wider, the overall interest rate differentials have minimized. Investors assess central banks’ policies based on their growth and inflation fundamentals.
India and other countries in the region maintain comfortable ranges for inflation and current account balance, reducing the need for rate hikes to manage macroeconomic stability.
Q5: Have interest rates peaked in India?
Yes, we don’t anticipate further rate hikes by the RBI. However, if the US Fed raises rates and oil prices increase while India’s macro stability indicators deteriorate, the RBI may need to reconsider. Rate cuts are expected once the US Fed signals the end of rate hikes and the dollar weakens.
Q6: How will the RBI manage fund inflows due to India’s inclusion in the JPMorgan index, and what does it mean for the currency market?
The actual inflow impact depends on emerging market sentiment and the dollar’s strength. Moderate inflows should not overly pressure the Indian rupee, as India maintains a current account deficit. These inflows will assist the RBI in foreign exchange management, particularly in the face of rising oil prices and geopolitical tensions. Overall, it contributes to India’s macro stability without radically altering the currency market dynamics.