India Should Welcome Potential Rupee Weakness, Says JPMorgan's Sajjid Chinoy

The Indian rupee will stay stable and any weakness must be welcomed as it improves India's external competitiveness, according to Sajjid Chinoy, India Chief Economist at JPMorgan.

The current policy action by the Reserve Bank of India is the right one, as it must be based on a broad trade-weighted real effective interest rate, he told NDTV Profit's Niraj Shah, at JPMorgan's India Investors Summit.

"When we want exports to grow and not be flooded by Chinese imports, the last thing we want is a stronger currency."

A strong currency is not at the interest of India's growth, Chinoy said. "The RBI has been ensuring that the broad trader weighted exchange real rate has been flat or stable in the last five-six years."

The central bank can either control price or quantity. "RBI focuses on price and that is the right focus."

With this, India could deviate from the Fed and the reason the interest rate differential has come down is because of the war chest of reserves. "This gives the RBI those degree of freedom to not follow the Fed."

India is better placed among Asian countries in case of any global events, given the large war chest of reserves that the central bank owns, according to Chinoy.

Asia is one region where most economies are below their pre-pandemic path with most economies under a slack, he said.

Many countries in Asia ought to have been easing a year ago but could not because they are small open economies, he said. "What happens in the Fed affects them directly and policy rates differential with the US are at historic lows."

India is in a different camp because of the war chest of reserves, the chief economist noted. "So, Fed's actions did not impact India like other countries." While the Fed action makes in easier for RBI to cut rates, it will primarily be based on the domestic growth-inflation dynamics, said Chinoy.

With the US Fed beginning its rate cut cycle, Chinoy expects a slew of rate cuts across Asia. "If they had cut earlier, there would have been more pressure on their currency."

India is getting closer to a rate easing cycle and is likely to begin in October or December, Chinoy said. "My sense is that every passing week, the news on inflation is getting better."

The core inflation has been very soft for the last nine months. But the issue was always food inflation, he said. "With strong monsoon, good sowing and benign global food prices, we are seeing inflation undershoot RBI's own forecast."

More data will be needed by the RBI to assess the beginning of the cycle, according to him.

The private capex cycle is facing issues due to massive excess Chinese capacity, according to Chinoy. "Financial conditions are very benign in India. More demand visibility is what Indian corporates are looking for."

Rural consumption is starting to pick up but we will need to see if urban consumption is holding up, he said.