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JPMorgan's Jahangir Aziz On Fed Taper, Evergrande And India’s Growth Narrative

This entire narrative that India is seeing a V-shaped recovery becomes problematic if you are also basing policies on it.

A statue of Mahatma Gandhi stands in front of Parliament House during the first day of the 17th Lok Sabha in New Delhi, India. (Photographer: T. Narayan/Bloomberg)
A statue of Mahatma Gandhi stands in front of Parliament House during the first day of the 17th Lok Sabha in New Delhi, India. (Photographer: T. Narayan/Bloomberg)

The U.S. Federal Reserve's indication that a tapering of bond purchases may begin as early as November was met with relative calm across global markets. The Fed has telegraphed its move well and the market believes the world's most powerful central bank will remain responsive to incoming data, according to JPMorgan's Jahangir Aziz.

"We've been talking about 'talking about taper' for awhile now and that the Fed will be announcing something by November," Aziz, head of emerging market economics at JPMorgan, said in a conversation with BloombergQuint. The only event risk between now and then is the U.S. non-farm payroll data for October, he said. "Unless that disappoints in a big way, we are set for tapering beginning in November."

The Fed also signaled that tapering would conclude by about middle of 2022.

We had built in about $15 billion a month in tapering. If they begin in November and end in July, that amount will be larger. But Powell was careful to say that will depend on data.
Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

While it is difficult to say whether there would be a tantrum across markets as the unwind begins, the Fed seems very aware that they need to do this in a cautious and tempered way, he said.

The likely lift-off in interest rates in the U.S., as indicated by the Fed's dot-plot, suggests that at least 50% of Federal Open Market Committee members see the first hike in rates only in 2023. "My guess is that if the data weakens, the section of the FOMC that sees a 2022 rate hike will very quickly push back their view," said Aziz, adding that even any rise in interest rates is more "data-dependent" than "time-dependent".

With the reaction to the Federal Reserve's normalisation muted and a change in the market view around global growth and inflation, concerns around premature normalisation of financial conditions across the world have also receded.

"The fear that you will see massive synchronised growth and inflation has eased," Aziz said, adding that the world in the last nine months has proved to be very different.

The world has realised that the globally synchronised reopening story is not there anymore and that is clearly reflected in what has happened to the U.S. 10-year bond yield.
Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

The benchmark yield has stabilised around the 1.25-1.3% level. While JPMorgan expects the 10-year to move towards 1.7% by the end of the year, the move will be gradual.

"This is unlikely, in the absence of some other shock, to force emerging market central banks into premature tightening. What might force them into premature tightening is their own local concerns," Aziz said.

Understanding The Evergrande Impact

Alongside the Fed's upcoming normalisation, global markets have warily watched a possible default by Chinese property developer Evergrande.

The impact of this should be assessed separately via financial market channels and the real economy, said Aziz.

According to Aziz, allowing large corporates to default is a continuation of a strategy that China has adopted since 2018. This was something that the market always wanted as the credit market needed to differentiate between good credit and bad credit. This, according to Aziz, was difficult to do given the implicit guarantee of default that existed in China.

This (Evergrande) is being used as signal that there is nothing too big to fail in China. There are no more implicit guarantees in China.
Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

Even if Evergrande were to fail, the impact on real activity in China is likely to be limited, added Aziz, explaining that Evergrande was not participating in the investment process in the country for some time due to its high leverage, neither was it generating much in terms of sales.

The impact on the financial side is also likely to be limited.

The credit liabilities of Evergrande, which include loans and bonds, are about $88-89 billion dollars. "That's about 0.2% of China's assets, so I don't think that will have a systemic impact."

Fiscal Inaction; RBI's Juggling Act

As central banks globally start to normalise, albeit at varying speeds, India is among the countries where monetary policy remains ultra-easy. Fiscal support to the economy, in contrast, remains limited.

"The narrative in India is probably one that has very little to do with reality," Aziz said.

This narrative suggests that the Indian economy is seeing a V-shaped recovery. This, Aziz said, is based on an "antiquated" method of GDP which measures the pace of growth using a year-on-year lens. Most large global economies use a quarter-on-quarter, seasonally-adjusted measure.

Going by that metric, the Indian economy contracted 23% in the April-June quarter of FY22. "The massive V-shaped recovery took place in the third and fourth quarters of FY21. "India's V-shaped recovery is over. It's done."

"This entire narrative that India is seeing a V-shaped recovery becomes problematic if you are also basing policies on it," Aziz said.

The wrong narrative (of a V-shaped recovery) is pushing the government towards adopting wrong policies on the fiscal front.
Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

Aziz remains critical of the limited fiscal support provided last year and this year, particularly via income transfers to the weakest segment of the population.

There is likely "massive damage" of household and small business balance sheets, Aziz said. "We are not seeing the impact because of the generosity of the RBI in extending forbearance. But one day that forbearance will go away."

My fear is that the lack of income support for two straight years is going to be, directly or indirectly, at least partly responsible for a potentially large permanent scarring that can take place. That is going to hamper medium-term growth.
Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

Is monetary policy in India then compensating for fiscal inaction?

The RBI is probably juggling too many balls, said Aziz. "But they are juggling these balls reasonably well. None of them have crashed so far."

Whether the RBI has voluntarily taken on the responsibility or if the responsibility has been imposed on them, the fact is that the central bank is taking care of inflation, growth, the exchange rate, the 10-year rate and the yield curve, said Aziz.

There was a brief period of time when the RBI's objectives, by virtue of the flexible inflation targeting framework, had been focused on one or two objectives. "In the pandemic period, we have gone back to where we were," Aziz said.

If you have to juggle these many balls, to say that you have to juggle them in a perfectly calibrated way, is impossible.
Jahangir Aziz, Head - Emerging Market Economics, JPMorgan

One area where the RBI's actions are perhaps bordering on the excessive, is on the liquidity front, said Aziz.

"You can't have that amount of sustained liquidity in the system without that liquidity finding a place to go into. It may not be going into consumer inflation, but it is definitely going into asset inflation," he said. "It may not be going into real estate but I can't understand how one justifies where Indian equity prices are without a direct link to how much excess liquidity the RBI is putting into the system."

Watch the full interview with JPMorgan's Jahangir Aziz here: