GST will be positive for India in the long term: Edward Teather, Economist - ASEAN & India, UBS

In an exclusive interview with ET Now, Edward Teather, Economist - ASEAN & India, UBS, says that markets are more concerned about policy moves over next 18 months. Markets will be surprised by Fed rate hikes in next 18-24 months. Edited excerpts:

ET Now: Governor Rajan is asking people or critics to show him how inflation is low and he has signalled that there is no rate cut in the offing because RBI is in sync with the inflation data. What do think about his latest comments? And how the rate trajectory is looking like in India?

Edward Teather: I will put this on broader concept of whether or not India is going to be targeting inflation down at 4% or whether inflation of 5% is fine, the debate around the inflation target in other words. I think the point Mr. Rajan is making is that inflation is a little under 6%, it is not particularly low by international standards. There is more work to be done to get inflation down to a level that he would consider healthy on a sustained basis. It is not the right time to say that the inflation battle is won. And I think this the point that Rajan want to thrust across, and I think he has been making that point for a number of months. And probably, we would not get a policy rate cut in the next meeting. The big question now is, what will the new RBI management and the NPC do with policy over the next 12 months because it is their call not Mr. Rajan’s.

ET Now: How critical do you think would it be for the August policy to actually see a rate cut from an equity markets standpoint?

Edward Teather: I do not think the market is concerned with what happens in August. What the market would really like to know is what is the framework for the next five years, what is the inflation target, who is the next governor, who will be on the NPC and what tone will they take and that has implications to the economy. I think the implications are going to play out on a 12-18 month horizon rather than the next six months.

ET Now: Where do you stand specifically for a country like India from international standards? Is India slightly different from the rest of the developed world?

Edward Teather: Inflation in the long run is a monetary phenomenon and India is no different to the other economies around the world. If we print an excessive amount of money we tend to get higher inflation. And when I say print, I mean, both how much money the central bank pumps into the economy, but also how much bank balance sheets expand in general and how much money is created through that channel. Some parts of the economy are cut off from credit. Bank credit does not alter the fact that the non credit part of the economy is linked inextricably with the parts of the economy that do get credit and the money moves easily between the two. The monetary policy matters for all parts of the economy and is a big driver of inflation in the longer run.

ET Now: How crucial is the passage of GST in this monsoon session? If the GST bill is not passed will it be a big dampener? Will you wait for this to happen till next session?

Edward Teather: If GST Bill is not passed in this session then may be people will doubt that it will happen at all or will be implemented at all during this term of parliament. GST when it is implemented is great for the long term prospects of India’s economy, what it does for internal trade, what it does for the broadening of the tax base in the economy. It also has the potential to be disruptive. If the GST Bill is not passed now then it goes into the next big election cycle and will get delayed for the next government to implement.

ET Now: How are you mapping the global mood right now? How are you mapping the India story and how would we stack up within the emerging market pack because it seems like stability growth seems to be sticking by with Indian economy and markets?

Edward Teather: There are two important trends that are impacting Asia. One is the low rate environment coming out of the US. Second is the disinflationary environment, the de-leveraging pressures in Asia and Europe also matters for Asia, India. Thirdly, slow down in China's growth , which is a break on Asian regional trade. In an Asian context, India looks relatively good, benefiting from lower inflation and disinflationary pressures. Indian inflation is higher than in many parts of Asia. At the same time it is not impacted from China's slow growth. India is also getting benefits from a downward biased policy rates. So, India looks relatively good in an Asian context.

ET Now: What do you think the Fed stance is going to be and will they hike interest rates this calendar year?

Edward Teather: The UBS view is that we do get another 25 bps hike in the Fed funds rate in December and then we will get two further hikes during the next year. The Fed is data dependent and we do know if the indictors like the non-farm payrolls are volatile. But at the end of the day, the unemployment rate in the US has come down a long way and is pretty close to what I think the Fed would call the natural rate. The rate below that you would expect wages to accelerate at some point. And I think policy rates are probably going to edge up and the market could be a little bit surprised as that plays out over the next 12 to 18 months.