Strong case for a rate cut by RBI: Jahangir Aziz, JP Morgan

economictimes.indiatimes.com:

With core inflation touching an all-time low, which is an indication of excess capacity in the economy, it makes a strong case for rate cuts by the Reserve Bank of India, says Jahangir Aziz, Head Emerging Market Economics at JP Morgan in an interview with The Economic Times. He also talks about how debt flows from the index inclusion could help in easing the balance of payments along with softer bond yields. Even as geopolitics is crucial, it is the outcomes of the US elections which will have a bigger influence on the markets. Below are edited excerpts from the conversation:

What is your assessment of the 50 bps rate cut by the Fed last week and its impact on the Indian market ?
We had expected 50 basis points of rate cut after the July non-farm payroll came in.

I think first we have to understand why the rate cut took place, right? If you looked at the US in 2023, you had a situation where the US was growing much more strongly than people had expected. And despite the strong growth rate, strong disinflation was taking place.

Typically, you don't see that happen. It was happening because most of the inflation that took place over 2021 and 2022 globally and in the US were driven by two factors.

One was a massive, synchronized surge in global demand when everybody opened at the same time. The other was continued supply-chain disruption especially as the largest manufacturing hub in the world, China, remained closed. This was worsened by the Ukraine War related spike in energy prices.

After China opened up in 2022 November and energy prices normalize, a large disinflation followed since mid-2023. In the US, labor markets, after the frenzy in 2021 and 2022 also began to normalize, easing wage pressures.