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00:00Well, we are at the J.P. Morgan India Investor Summit and in conversation with the man himself,
00:10Sajid Chinoy joins us right now.
00:12Sajid, so good talking to you.
00:13Thanks for being with us.
00:14Pleasure to be here.
00:15And thanks for having us at your summit.
00:16It's been wonderful.
00:17I hear it's the India interest is palpable and the biggest that you guys have seen.
00:21It's the largest summit we've had, exactly.
00:22Wow.
00:23There's a lot of interest in India.
00:24So let me start off by asking you, what has been the most asked question to you thus far?
00:29Early hours?
00:30Right.
00:31In a strange way, I guess it's the world we live in.
00:33It's about the Fed, right?
00:36Why did the Fed cut 50?
00:37And what has this been going forward for emerging markets and for India?
00:41And my answer always is less about whether it was 25 or 50.
00:45It was more about, is the Fed cutting from a position of strength or a position of weakness?
00:50And what do I mean by that?
00:52If we're on the cusp of a US recession, people talk about the SOM rule that has been triggered.
00:57If it turns out that the labor market is not bending but breaking and we're slipping
01:01into recession, the Fed will keep cutting by large increments.
01:06But that's a world in which there will be a risk-off and in which emerging market currencies
01:11will come under pressure.
01:12So the Fed can keep cutting.
01:14But if the US is in recession, that's not a good environment for most emerging markets.
01:18And then you're in this dilemma where, on the one hand, you know a global recession
01:23would warrant monetarizing at home.
01:25But if your currencies are under pressure, it makes it harder to cut interest rates.
01:29And that's a world we want to avoid.
01:31If instead the Fed is cutting more slowly from here on in, it's 25 and 25 and 25, but
01:36it's not because the US economy is in recession, it's because the US economy is slowing and
01:42the Fed is buying insurance to protect growth for 2025 and ensure some kind of soft landing.
01:48That's a world in which risk assets will do very well, right?
01:51So it really is, why is the Fed cutting?
01:53And the good news is that even though the labor market has been slowing, the vast multitude
01:59of indicators suggest the US economy is holding up.
02:02In fact, the Atlanta Fed's Nowcaster has US growth in the third quarter at 3%, very far
02:09from a recession.
02:10So if the economy is gradually slowing, and the Fed's own Taylor rules will suggest that
02:15if their forecasts are right, there's at least 200, 250 basis points they can cut to bring
02:21rates down to the level that's appropriate with growth and inflation.
02:25That's a very constructive world to be in, in which the US economy is slowing, the underlying
02:30fundamentals have not broken, and yet the Fed is easing monetary policy to buy insurance
02:35for a soft landing in 2025.
02:36Too early to say we're there, but it's that distinction I think that matters more than
02:41whether the Fed's going to cut 25 or 50 back in November.
02:44So actually that was going to be my next question.
02:46A lot of people have argued, and I think there were some dissenting Fed governors, right?
02:52Nine out of 19 participants saying soft descent, projecting 75, etc.
02:56So do people need to think too much about whether it's 25 November and then going ahead,
03:02could there be a miss?
03:03Could there be only 25 and not supersize?
03:05Will that be a problem or not really?
03:07It won't be a bad thing if the Fed is cutting 25 from here on in, for exactly the reasons
03:12I mentioned.
03:13If they get scared about the labour market, the next labour market print is again really
03:17weak, then the Fed may well go 50, right?
03:19But you don't want that to happen.
03:20You want to be in a situation where the economy is holding up, and the Fed is still moving
03:24in small increments, and it can still do that, because A, it has much more confidence that
03:29inflation is trending towards 2%, and B, because as I mentioned, it's about 200 basis points
03:35away from what their own Taylor rule would suggest rates need to be.
03:39Got it.
03:41What does this do to central banking actions across the world?
03:44Because I heard you say that this is idiosyncratic, Brazil is raising, Japan is raising.
03:49Where does this leave the Reserve Bank of India?
03:52Dependent on what the Fed does or not really?
03:53So let me answer this in two ways.
03:55I think one is Asia more generally.
03:57I think Asia is one region in which most economies in Asia are below their pre-pandemic path.
04:03And that's just another way of saying there's a fair amount of slack in many Asian economies,
04:08which is why core inflation in Asia has been so soft.
04:11It's the one region of the world, unlike LATAM, unlike EMEA, that you actually had very soft
04:16core inflation.
04:17And if you look at real rates in Asia, so policy rates in Asia deflated by core, these
04:22are very elevated.
04:24In other words, many of these countries should have been easing a year ago, but they could
04:29not ease because many of them are small open economies, and what happens in the Fed affects
04:34them directly, and their policy rate differentials with the US are historic lows.
04:38So if they had cut interest rates unilaterally or preemptively, there would have been more
04:43pressure on their currencies and more financial stability considerations.
04:47Now with the Fed cutting, it opens a green light to these economies.
04:51We saw Philippines cut in August.
04:52We saw Indonesia cut last week.
04:54So you'll get a slew of rate cuts in Asia, I think, Philippines, Indonesia, Korea, Thailand
05:00in the fourth quarter.
05:01India is in a slightly different camp because India has this war chest of reserves.
05:08So the Fed's actions didn't really affect India as much as it did many other economies
05:14in the world.
05:15And the simplest way to appreciate that is to understand that India's interest rate differential
05:20with the US used to be five percentage points.
05:23It's come down to one and a half percentage points.
05:25So the Fed kept hiking, and India did not have to hike because we've got this huge war
05:30chest of reserves.
05:31So while the Fed's actions make it easier for the RBI to move, I think primarily this
05:37is going to be domestic growth inflation dynamics that drive the RBI.
05:41So what's your sense on that?
05:42My sense is that every passing week, the news on inflation is getting better.
05:48Remember, core inflation, like in many parts of Asia, has been very soft in India for the
05:52last nine months.
05:53The issue was always food inflation.
05:55That's 46% of the basket, averaged 8% for the last year.
06:00So the RBI correctly wanted to ensure that food inflation gaps down sustainably because
06:05it's food that drives inflation expectations.
06:07Now the good news is very strong monsoon, good sowing, global food prices are benign.
06:13There's more evidence that food is gapping down.
06:16We're seeing inflation undershoot the RBI's own forecast.
06:19So I think we're getting closer to an easing cycle.
06:22Now whether it's October, whether it's December, we'll come down to the RBI's need to assess
06:27whether they need to see more data.
06:29Because as the governor rightly says, this is not about any one month being 4%.
06:33This is about having conviction that the next nine months are in the low fours.
06:37And I think maybe the RBI will require a little bit more time to be certain of that.
06:42But the one point that I think not just the RBI, but many central banks in the region
06:47have to worry about is in this world where you have a potential soft landing, risk assets
06:53are going to be on fire.
06:56And you want to be careful as a central bank not to stoke more financial exuberance.
07:01So the Bank of Korea is in the same dilemma, that you may have to ease interest rates because
07:06inflation is settling towards target.
07:08But at the same time, you want to be very vigilant that there's not excessive financial
07:12exuberance and therefore macro prudential measures may well need to be used in tandem
07:17to tame those pressures.
07:18And I think that's the balancing act that many EM central banks will have to contend
07:22with in a world in which the Fed is cutting because the US is heading towards some kind
07:27of soft landing.
07:28Again, that's not an assured outcome, but that's at this point what many people's baseline
07:32is.
07:33Most probably.
07:34Yours too, I presume.
07:35JP Morgan's baseline, yes.
07:37From an India perspective though, some people attribute the lack of pickup in private CAPEX
07:43also to the fact that interest rates are stubbornly high.
07:46RBI is an unenable job then, if it doesn't cut rates, presuming that that's the reason
07:51or one of the reasons, then the private CAPEX cycle, which has been waiting, waiting, waiting,
07:56and the government CAPEX might be peaking as well, you would have an insight there too.
07:59What happens to the private CAPEX cycle therefore?
08:01So I'm not convinced that the private CAPEX cycle has not picked up because interest rates
08:05are high.
08:06Because if that was the case, you would have seen booming private CAPEX two years ago,
08:09when interest rates were very, very benign in the pandemic, right?
08:12I mean, a combination of…
08:14No, and I think it's a good point.
08:16I think the distinction is, even though interest rates may be where they are, if you look at
08:20financial conditions more generally in India, same issue with the US, they're very benign.
08:25Look at asset prices, look at where equity markets are, look at where credit spreads
08:29are, look at where liquidity is.
08:30Financial conditions actually are very benign.
08:32My sense, I think, on the private CAPEX cycle is something that most emerging markets are
08:36contending with, which is the elephant in the room here is massive Chinese excess capacity.
08:42Now, when you've got so much excess capacity that's flooding into different markets, as
08:47far apart as Brazil and India, corporates are going to be a little bit more wary of
08:53saying, we should only invest when we have clear demand visibility, given this excess
08:58Chinese capacity.
08:59So I think we're right in the sense that we need, and I think this process has begun but
09:04needs to culminate, is there needs to be more demand visibility for Indian corporates.
09:10And when they see that, then there's more of an incentive to invest, given that you're
09:15competing with a lot of Chinese excess capacity.
09:17There's one statistic I'll just throw out on China.
09:21China is on course to producing 70 million electric vehicles in 2030 by itself, 70 million.
09:28Global demand for EVs in 2030 is expected to be 44 million.
09:32China is on course to producing 150% of what the world is going to demand in terms of EVs.
09:38That's the quantum of the China shock 2.0 that the world is up against, right?
09:43So we need to be realistic in that environment.
09:46Wow.
09:47Sajid, I have a question on the rupee too, but before that, I'm just throwing this out
09:52at you.
09:53China is producing mammoth sums of all commodities and goods.
09:58It is not consuming as much.
10:00World is not necessarily a growth place currently, Europe, rest of Asia, et cetera, maybe Japan
10:05leave out.
10:07What happens to asset prices in such a scenario or goods prices in such a scenario?
10:11Do we see a massive deflationary factor and therefore is the private capex cycle going
10:16to be a lot back-ended than what people believe?
10:19I think it's clearly a pressure point.
10:21You're exactly right that we haven't seen the Chinese rebalancing that people had hoped
10:25for.
10:26There's a huge focus on production.
10:27Chinese domestic demand remains very soft.
10:30So far, China has been benefiting from strong external demand, but if the global economy
10:36is gradually slowing, you can't even be sure of that external demand, right?
10:40So where is this capacity going to go?
10:41And this is where you get things like trade war starting, right?
10:44The US may well, if there's a Trump presidency, may well impose higher tariffs.
10:50Then that capacity may well come to Asia, right?
10:53So every country is going to be kind of vulnerable to this excess capacity and that will clearly
11:00have a bearing on investment cycles all around the world.
11:04So India too, there's a likelihood that the private capex cycle might be back-ended for
11:07the right reasons, of course.
11:08Yeah, yeah.
11:09I think it comes down to demand visibility, right?
11:12I think what Indian corporates will need to see is if you do see more visibility on consumption,
11:19if we do get a couple of more years of public investment by the government, if you do see
11:23some strands of export growth picking up, then there's an incentive to do so.
11:27But we do need to see that demand visibility for corporates to invest in a significant
11:34manner.
11:35What's your sense on demand and visibility there of the next 15 months?
11:38So I think the good news is that we're finally after a long time seeing rural consumption
11:44pick up, but we need to just ensure that that sustains and that continues.
11:50And we also have to be mindful that urban consumption, which has been driving it, doesn't
11:53slow in tandem.
11:55So what you want to be sure of is this is a consumption acceleration and not a consumption
11:59rotation.
12:01That urban was driving it, rural was soft, now rural is picking up and urban is slowing.
12:05So we have to wait and see how that plays out.
12:07I think the other important point is public investment.
12:09And again, the government capex, central government capex, has doubled in the last five years.
12:14And it's important that that goes on for another couple of years at least while the
12:19private sector steps in.
12:21And the way to square that is if we want public investment to not come off sharply, but deficits
12:27have to come down for debt reasons, then the focus has to be taxed to GDP.
12:32So I think India in the next couple of years will have to continue down a path where we
12:35mobilize revenues.
12:36And this becomes a revenue-based consolidation so that we protect public investment.
12:42Again, there the initial signs are very encouraging.
12:45Last year gross tax to GDP was 18% for the first time ever, the highest ever.
12:50So we have seen some progress on that front.
12:52We need to see more progress on that front so we can bring deficits down, but still keep
12:56public investment high to provide that visibility to the private sector.
13:00Got it.
13:01Wow.
13:02Interesting point.
13:03My final point.
13:04And I mean, I'm just out of the blue just asking you about the rupee.
13:08I'm just trying to think.
13:09It's a global easing cycle, if you will, or maybe an idiosyncratic easing cycle, but
13:13largely easing.
13:14Yes.
13:15What happens to the rupee, you think?
13:16I think not very much.
13:19And I'm saying that because I think the policy actually is the right one.
13:22So the way to think of the rupee is to look at the broad trade-weighted real effective
13:26exchange rate.
13:27That is the broadest measure of competitiveness.
13:29And I keep saying that we want exports to grow.
13:32We don't want to be flooded by Chinese imports.
13:35The last thing in the world you want is a stronger currency.
13:38Because if you have a stronger currency, A, your exports become less competitive, and
13:42B, your imports, especially in China, become cheaper.
13:45So a strong currency is not in the interest of India's growth.
13:48And I think the RBI has correctly been ensuring that the broad trade-weighted exchange rate
13:53has been flat or very stable in the last five, six years.
13:57People keep asking, well, why are they accumulating so many reserves?
14:00Because if you're focusing on, you can either control price or quantity.
14:04You can't do both.
14:05The RBI has correctly focused on price, which is the real effective exchange rate, which
14:09means quantity becomes endogenous.
14:11I have to buy or sell as many dollars as I do to ensure that.
14:15So I think that's the right focus, A. B, you know, the reason that India could deviate
14:22from the Fed and that interest rate differential has come down is precisely because we had
14:26this war chest of reserves.
14:28The fact that we have $700 billion, the fact that the current account is very benign, the
14:33BOPs and surplus gives the RBI those degrees of freedom to not have to follow the Fed and
14:39to bring those differentials down.
14:40So I think we must appreciate, you know, what those reserves have bought for us.
14:44And the final thing I'll say is, unlike many countries in Asia, our reserves are not earned
14:49reserves.
14:50In those cases, they were current account surpluses, countries, and they earned that
14:53reserves.
14:54Our reserves are borrowed reserves in the sense that they are built through capital
14:58inflows.
14:59So for every dollar the RBI is holding, there's a dollar in the economy, a liability in the
15:04economy which can unwind.
15:05So I think the RBI's policy has been very appropriate on the external front.
15:08I think we should continue on that in that vein.
15:10And the rupee kind of stays stable, if you will.
15:12Stays stable.
15:13I mean, if we get a chance for it to weaken, we should welcome that because, again, that
15:19improves India's external competitiveness.
15:21Great.
15:22Sajid Chinoy, always a nugget or two that comes out at the very least.
15:25Today was no different.
15:26Thank you for your time.
15:27And have a great conference.
15:28Always a pleasure.
15:29Thanks very much.
15:30It was our pleasure.
15:31And viewers, thanks for tuning in.