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We expect another Fed rate cut in first half of 2020: Jahangir Aziz, JPMorgan

There is a recovery taking place in India as the relentless decline in high frequency indicators have stopped. The problem is with how strong this recovery could be.

ET Now|
Dec 12, 2019, 09.43 AM IST
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In India, the high frequency indicators turning around would face headwinds given that all of a sudden, we now have financial conditions tightening here, rather than easing which is what is happening in the rest of the emerging market or world, says Jahangir Aziz, Head, Emerging Market Economics, JPMorgan. Excerpts from an interview with ETNOW.

The US Fed has kept interest rates unchanged this time around and more importantly, signalled no rate hikes in 2020, sticking to the sidelines during an election year. What is your view?
The pause was well telescoped. Our view is that probably given the push to change the framework of interest rate targeting in the US, which has been going on for some time, the Fed will most likely keep rates lower than what they normally would do and therefore we expect another cut in 2020 in the first half.

The US President is insisting that Fed should cut rates. On the other hand, he is also claiming that the US economy is doing rather well. If Fed cuts rates, that means there is a problem in the economy. Why is Donald Trump indicating that the US is doing well and Fed should cut rates?
There are lots of statements that come from the administration. If you are trying to find consistency across these statements, then I do not really think that is a very useful way to spend a morning or evening. I would rather take those statements at their face value and instead focus mostly on the actual institutions or agencies within the US which are making those decisions -- the treasury, in the case of the budget; the Fed in the case of monetary policy and the commerce department in the case of US-China trade negotiations.

The Indian central bank pre-empted the Fed move and it was a pause for us as well. On the economic recovery, what is it that you are reading? Do you sense that sporadic recoveries can be seen and perhaps it can reflect in the end of the quarter numbers?
It is undeniable that you are seeing signs of recovery taking place in the sense that the relentless decline in high frequency indicators have stopped. Some of these indicators are picking up. The problem is with how strong this recovery could be. A significant portion of the recovery in the forward looking indicators, for example PMR, was based on the idea that the RBI would keep monetary conditions loose and would keep financial conditions easy.

The fact that the RBI reversed course despite the fact that it actually brought down growth forecast by significant amount -- even lower than we have and despite the fact that six to nine months ahead in their own forecast, they had inflation below their own inflation target and still not cut rates -- had essentially ended up raising interest rates and raising funding cost in India.

I am not exactly sure what the RBI was thinking but the high frequency indicators turning around would face headwinds given that all of a sudden, we now have financial conditions tightening in India rather than easing which is what is happening in the rest of the emerging market or world.

In addition, we know for a fact that because of the supply cycle strength in terms of liquidity, the 135 bps of policy rate cut have actually been transmitted to lending rates.

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