The world is not witnessing the beginning of stagflation but moderate growth and high inflation, said Chetan Ahya, Chief Asia Economist & Global Head of Economics, Morgan Stanley in an interview with ET Now.
What is Stagflation?
Stagflation is when an economy suffers from high inflation and low economic growth.
"We would not call the outcome of the state of the economy as stagflation because we are still seeing expansion in various parts of the world, especially in the US, which is an important economy to qualify us to be in stagflation or not," said Ahya.
"One important variable that we would look at as a stagflation marker is rising unemployment. Right now we do not have that. I would say it is a case of moderate growth and high inflation rather than a state of stagflation," Ahya added.
Ahya believes the rate hikes are the demand of the time and RBI needs to maintain the course and take policy rates higher.
"The RBI needs to kind of stay on that track and take policy rates higher. We do think that the policy rates needed would be quite meaningfully higher than where we are today and so we have the terminal rate at 6.5 percent," said Ahya.
He expects that the RBI will lift policy rates by 50 bps in the June meeting and then another 50 bps in the August meeting.
"That is the pace which should be required to ensure that inflation expectations do not become a problem for India. So yes, we do expect normalisation to happen at a rapid pace now," he said.
Ahya said that India, like the other economies of the world, will also witness the impact of higher commodity prices and for CY2022, his GDP growth forecast is at 7.5 percent which is a 12-month ending December 2022. For the next year, his forecast is 7.1 percent.
However, he added that there is a downside risk to this projection because of the elevated commodity prices, especially oil. Also, the slowdown in China will have an impact on global trade and global growth.
Talking about inflation, Ahya said inflation will moderate and it will go below 6 percent, to around 5.5 percent. However, he added that even if we are at 5.5 percent, we need to get back to the 6.5 percent nominal repo rate.
"Our view is that inflation will moderate and it will go below 6 percent, to around 5.5 percent but even if we are at 5.5 percent if you think that the normal real rates in the system should be at least about 100 bps, we need to get back to 6.5 percent nominal repo rate. That is the reason why we are forecasting the terminal policy rate at 6.5 percent," said Ahya.
"There are upside risks to that inflation forecast of 5.5 percent. So, in our minds, 6.5 percent is the base case. There is a risk that RBI may have to do more if it wants to have the real interest rates in the range of 100 bps positive," Ahya added.
Disclaimer: This report is compiled from an ET Now interview. The views and recommendations made above are of the analyst and not of MintGenie.