JP Morgan’s Sajjid Chinoy at Explained: While the Federal Reserve continues to hike policy rates, despite extreme stress in the banking sector, is a hard landing inevitable? What implications does it have for India? What are the multiple channels through which global risks will be transmitted to India? Is India, where inflation continues to be over 6 per cent and the RBI continues to tighten the monetary stance, better placed to manage the fallout of what could be a global crisis?
To discuss this and more, and what the next financial year holds for India and the rest of the world, listen to the session of Explained with Sajjid Chinoy, Chief India Economist, JP Morgan, and Part-Time Member, Prime Minister’s Economic Advisory Council.
The discussion comes as the Reserve Bank of India said in a report that even as global growth is set to weaken or enter into recession in 2023, the Indian economy may not slow down and is likely to maintain the pace of expansion witnessed in 2022-23.
“Banks have been recapitalised, the NPAs have been resolved, thankfully NPAs in the pandemic were very much less than feared. Banks are, after a long time, are in a good shape and you can see that in their lending behavior. Regulations have always been prudent in India, giving everyone much more comfort.”
Sajjid Chinoy said that stagflation happens when you get a huge supply shock. “As supply shocks are normalising, crude oil prices have come down, for commodity importers like India, that actually provides a tailwaind.”
“We need to keep in mind that if the global economy slows, India will not be immune because we are very integrated. We should not be panicking. We will be seeing this around the world. If the US is in recession, other markets are slowing, some slowdown is inevitable. Think of that as the necessary adjustment that the world is undergoing. The key is to keep focussing on the fundamentals, so that when the strife is over and the economy is recovering and the interest rates are being eased, that India is in a good position,” he said.
It is unlikely that we see a recession in the next three to six months. Strength of the real economy along with proactive and pre-emptive regulatory response could stave off a new term crisis or recession. But uncertainty remains high–when US rates move 500 bps in a year, chances are there will be more breaks. The original sin here was that the pandemic support was excessive and monetary normalisation was very delayed. Also, immigration curbs accentuated labour market tightness.
Chinoy believes that the “supply side is not responding and the Fed will have to create unemployment unfortunately and push wages down to make that inflation target. The good news is that the economy is strong, central banks are being pre-emptive but it’s hard to see a soft landing.”
Normally, the financial sector stress is a symtpom of underlying economic balances, like the excessive leverage, prices falling, growth slowing. But what is different is that the financial sector stress is battling a very resilient global economy, Sajjid Chinoy said.
Chinoy said that the starting point was the massive stimulus to economies after Covid. “While everyone was worried about inflation, what was missed by most commentators was that there was a surge in bank deposits. At the time, the recovery was slow in the first year because restrictions were in place, and there were multiple Covid waves. So, the banks got government bonds. These were imprudent decisions, because they got long-ended bonds, exposing themselves to more interest rate risks,” he said.
In the latest — July update of the — World Economic Outlook, the IMF has downgraded the growth projections for the US, China and India. “Downgrades for China and the United States, as well as for India, are driving the downward revisions to global growth during 2022–23, which reflect the materialization of downside risks highlighted in the April 2022 World Economic Outlook,” it states.
A global slowdown is unlikely to have any positives for India apart from some relief in crude oil prices.
The IMF has knocked off almost a full percentage point each (0.8%, to be precise) off India’s GDP projections for the current year and the next.
“For India, the revision reflects mainly less favorable external conditions and more rapid policy tightening,” explains the IMF.
On US financial sector, Chinoy says, “for now, stress in mid-sized US banks appears to be a liquidity shock, not necessarily a solvency concern.”
Sajjid Chinoy said that very elevated inflation has been seen around the world. It is the highest inflation the world has seen since 1970s.
“It is a result of interaction of demand with a struggling supply side. Supply chains were shut during covid. Then the Russia-Ukraine war further hit supply. Supply curve has stalled, leading to very sticky inflation,” he said.
We began the year with people saying it is a soft landing. Perception then changed that it is going to be a hard landing, and then two US-based banks go down and then near recession, , said JP Morgan’s Sajjid Chinoy
The elephant in the room is if this is like the 2008 recession, said Chinoy. Because housing prices are falling, mid-sized banks have gone down under, bank stock prices are falling, and the contagion across the Atlantic with credit suisse takeover is not heartening.
Aggressive monetary tightening — like the one currently underway in the US — involves large increases in the interest rates in a relatively short period of time, and it runs the risk of creating a recession. This is called a hard-landing of the economy as against a soft landing (which essentially refers to monetary tightening not leading to a recession). The chances of a soft-landing for the US exist but are extremely low.
This is called monetary tightening, and the Fed (or any other central bank, for that matter) resorts to it when it wants to rein in inflation in the economy. By decreasing the amount of money, as well as raising its price (the interest rate), the Fed hopes to dent the overall demand in the economy. Reduced demand for goods and services is expected to bring down inflation.
The FFR is the interest rate at which commercial banks in the US borrow from each other overnight. The US Fed can’t directly specify the FFR but it tries to “target” the rate by controlling the money supply. As such, when the Fed wants to raise the prevailing interest rates in the US economy, it reduces the money supply, thus forcing every lender in the economy to charge higher interest rates. The process starts with commercial banks charging higher to lend to each other for overnight loans.
Even as global growth is set to weaken or enter into recession in 2023, the Indian economy may not slow down and is likely to maintain the pace of expansion witnessed in 2022-23, the Reserve Bank of India (RBI) said in a report on Tuesday.
India has emerged from the pandemic years stronger than initially thought, with a steady gathering of momentum since the second quarter of the current financial year, the report said. Read more
As concerns mount over a developing financial sector crisis after the collapse of three mid-sized banks in the US, and the acquisition of Credit Suisse by UBS, the spillover effects of these developments on emerging economies are being closely monitored.
The financial sector developments come in the wake of rapid tightening of monetary policy globally to fight back multi-decade high inflation particularly in developed economies.
Earlier this month, the US Federal Reserve hiked its federal fund’s rate target range by 25 basis points with markets expecting another rate hike of a similar quantum in the next meeting in May.
In India, the Reserve Bank of India’s Monetary Policy Committee is seen increasing the repo rate by 25 basis points in its next policy review on April 6. If this happens, it would take the total quantum of rate hikes by the RBI to 275 basis points since May 2022.
Amidst the banking sector crisis in the US and Europe, Finance Minister Nirmala Sitharaman had met heads of public sector banks on Saturday and asked them to remain watchful of the global developments and take measures to protect themselves against any financial shocks.
While government officials have maintained that they do not expect the spillover effects of a crisis, an exogenous financial sector shock would be a huge concern at a time when India’s growth is seen slowing down from an estimated 7 per cent this financial year to 6.4 per cent in 2023-24, as per the RBI’s latest forecast.
In conversation with Executive Editor P Vaidyanathan Iyer, JP Morgan’s Chief India Ecnomist Sajjid Chinoy will discuss the ways in which the Indian economy should be looked at in times of inflation, constraints to growth, and persistent global risks.
While the Federal Reserve continues to hike policy rates, despite extreme stress in the banking sector, is a hard landing inevitable? What implications does it have for India? What are the multiple channels through which global risks will be transmitted to India? Is India, where inflation continues to be over 6 per cent andthe RBI continues to tighten the monetary stance, better placed to manage the fallout of what could be a global crisis?
To discuss this and more, and what the next financial year holds for India and the rest of the world, listen to the session of Explained with Sajjid Chinoy, Chief India Economist, JP Morgan, and Part-Time Member, Prime Minister’s Economic Advisory Council.
Amidst the banking sector crisis in the US and Europe, Finance Minister Nirmala Sitharaman had met heads of public sector banks on Saturday and asked them to remain watchful of the global developments and take measures to protect themselves against any financial shocks.
While government officials have maintained that they do not expect the spillover effects of a crisis, an exogenous financial sector shock would be a huge concern at a time when India’s growth is seen slowing down from an estimated 7 per cent this financial year to 6.4 per cent in 2023-24, as per the RBI’s latest forecast.
Meanwhile, Chief Economic Adviser V Anantha Nageswaran said states would have a “higher degree of role” to play than the Union government to push India’s growth rate in the coming decade since issues related to health, education, labour and land are “largely in the realm of state governments”.
