'India’s ‘sugar high’ warrants caution on RBI hikes'

India's economy is experiencing a temporary economic boost, often referred to as a "sugar high," due to earlier stimulus measures, warns JPMorgan Chase & Co.'s Jahangir Aziz. The central bank may raise interest rates by a quarter point this year, according to Aziz, but he is uncertain about the subsequent steps. Markets are pricing in around 100 basis points of hikes this year.

Aziz points out that the economy's solid growth of nearly 8% in the latest quarter must be considered against substantial policy support, such as cuts to borrowing costs and the goods-and-services tax, as well as regulatory easing that stimulated credit growth. He warns that another round of GST cuts is unlikely, and rapid credit expansion might concern regulators.

The Reserve Bank of India faces a challenging decision about how much tightening the economy can handle. While excess liquidity in the banking system has kept some market rates below the policy rate, tighter financial conditions could eventually impact both business investment and household consumption. Aziz advises caution and careful monitoring of the impact of rate hikes on financial conditions and real activity before assuming that the RBI will continue on the rate hiking cycle.