RBI to face the heat if US Fed starts raising rates by June; 7% growth may be a stretch: Jahangir Aziz

Aziz believes the pressure on India is likely to be less if the 10-year yield remains stable and is not disrupted. He said, "More importantly, I think what really drives central banks with current account deficits to raise rates are two factors - one is what happens to the 10 year rate, because that's the funding currency for capital flows and what happens to the dollar. If the 10-year yield remains well behaved and doesn't become an anchor, I think the pressures on India will be much less."

He added, "Clearly the bigger factor, even more than the 10-year rate, is what will happen to the dollar. If the dollar strength is not disruptive again, I think India will have the space. But it's not an infinite space."

Govt slashes import duty on refined palm oil to 12.5% to cool retail prices; experts weigh in

As far as the US is concerned, Aziz is of the opinion that the Fed will begin tapering by March. He stated that central banks of developed markets are normalizing and are being led by the US Fed. He expects the lift-off to be gradual in June.

"Developed markets' central banks are normalizing, led by the Fed, UK is just shortly behind them. The tapering will be done by March and we are expecting from June onwards a lift-off. But the lift-off is going to be very gradual, we are just expecting a 25 basis points rate hike, one per quarter," he said.

He is of the opinion that inflation at the moment is being underestimated. The risks to inflation may come from Omicron and disruptive oil price movement.

Also Read: Asia's inflation may be fuelled by rising shipping costs: IMF

On GDP, Aziz believes 7 percent growth for India is quite a bit of a stretch. He explained that the permanent damage of COVID-19 has been underestimated. He estimates that the Central and state government fiscal deficit will likely be at 10.8-11 percent of GDP.

He mentioned, "My guess is that 7 percent will be a stretch because what we are not taking into account is the fact that this virus necessarily has done permanent damage and long-term scarring to labour market participation, balance sheets of SMEs, balance sheets of household sectors and without any kind of material income support coming from the government, we are going to face headwinds coming from that."

"This permanent damage is being seriously underestimated. The deficit that we are seeing is because the government being central and state government together is running at 10.8-11 percent of GDP fiscal deficit," he explained.