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India will need to make a ‘growth sacrifice’ to slow inflation, says JPMorgan


CNBC heard Thursday from a JPMorgan economist who said that India would need to “growth sacrifice” in order to limit inflation.

The repo rate is the interest rate banks pay to the Reserve Bank of India for borrowing money from it. It was raised by 50 basis points on Wednesday to 4.9 percent. It is continuing the RBI’s reverse of its supportive policies to encourage growth. However, 7.2% was retained by the central bank as its growth goal.

There is inflation, but there’s no cap on the growth target. This is a strange combination. It’s a very strange combination. It’s a good idea, I believe. [a]On CNBC’s Squawk Box Asia, Jahangir Aziz said that growth must be sacrificed.

Inflation has been trending higher,The central bank was forced to increase interest rates quicker and more rapidly than expected. In April, surging food and fuel prices took India’s retail inflation to an eight-year high of 7.79%.

“The upside risks to inflation … have materialized earlier than anticipated,Both in terms of time and magnitude,” Shaktikanta Das, Governor at RBI, said Wednesday. This signaled that the central bank would likely continue its accommodative policy de-emphasis.

We face tough choices

Aziz indicated that there is still room for the central bank to increase rates by 25 basis point after Wednesday’s vote. The RBI has already cut rates by 75 basis factors during the pandemic. Things would only get worse from there.

“The big question now is what happens next? [if]Aziz indicated that inflation will not slow down. “If the growth rate slows down, that will be a problem.” the RBI pause orDoes the RBI provide what the market wants?

These difficult decisions would be made by JPMorgan’s economists in November or December, he said.

According to Upasna Bhhardwaj (chief economist, Kotak Mahindra Bank), it is essential that RBI actions be “front loaded”. Bhardwaj stated that rate increases would be halted if inflation drops below 6% in the final quarter of the financial years.

“It is evident that the Indian situation is in flux because the price trend for crude oil is crucial to Indian inflation. [With that in mind]The repo rates range will be between 5.75% and 6% at the close of the financial year. However, the effective policy rate is expected to be 25 basis points higher,” she stated.

Bhardwaj noted that the central bank had raised its rate by 90 basis in the last month. He said the central bank is taking a more hawkish approach to other policies.

“We don’t think there will be an aggressive rate hike cycle, but we believe the first-loaded actions are absolutely essential.” Bhardwaj stated. Consumer demand would be affected by rate hikes.

She predicted that rates would reach 5.75% at the close of the financial year. However, her forecast was slightly different from JPMorgan’s economist.

Bhardwaj indicated that the GDP is forecast to grow by 7.3%, and some effect will be felt on the demand at the end.

Based on a survey by the central bank of macroeconomic indicators between May 13th and June 3, it was estimated that the repo rates could reach 6% before the end the financial year.