There's a case for RBI to cut rates: Jahangir Aziz, JP Morgan Chase
core inflation headed further south points to likely excess capacity in various pockets of the economy, buttressing the case for an immediate cut in policy rates, although geopolitics could have a disproportionate say on the cost of debt globally, said Jahangir Aziz, head, emerging markets economics at JP Morgan Chase.
India's June core consumer inflation, which strips out the impact of transitory fuel and food prices, was at 3.14% — the lowest since the inception of the gauge in 2012. Core inflation has been declining since the beginning of the year.
«In any economy, when you have sustained declines in core inflation, it not only means that the country has excess capacity, but also that the excess capacity is widening and not narrowing,» Aziz told ET. «So, if you have a country in which the excess capacity is widening, then your interest rates are far too restrictive and, therefore, interest rate needs to be recalibrated lower.»
The Reserve Bank of India (RBI) has kept its benchmark policy rate unchanged at 6.5% over nine straight meetings on concerns over high food inflation. The Monetary Policy Committee is scheduled to meet in early October to review its decision, and its meeting comes within weeks after the US Federal Reserve reduced rates for the first time in more than four years in mid-September.
«The RBI should cut, regardless of what the recorded growth shows, as the proof of the pudding is in the inflation,» Aziz said. «Core inflation today is at its lowest since the inception of the index in 2012.
