Rajeev Malik of JP Morgan Chase Bank expects GDP growth to surprise on the upside. According to Malik, the budget is likely to be market friendly.

In his opinion, the uncertainty of the monetary policy actions a concern. He feels that the ordinance on SLR cut has been sending confusing messages to the market.

He anticipates Fed to up rates in the second half. Malik informs that JPMorgan is still bearish on the rupee.

Excerpts from CNBC-TV18's exclusive interview with Rajeev Malik:

What are your expectations from the key economic indicators in 2007? What are the key risk and upside possibilities, upside surprise possibilities that you see this year?

I think you have a delectable mix of structural and cyclical factors, more structural than cyclical, that will ensure that the ongoing strengthened consumers spending and the revival in investment spending continues. It is interesting that people tend to underestimate how long the current investment revival has been to a large extent.

Investment spending started to recover as early as 2003 - something that lot of people ignored. It indicates the underline sustainability of the current upturn.

The March end monetary tightening does not necessarily derail investment recovery, so in India's case along with stuff getting complimented by structural factors, the growth momentum would look pretty strong and I think that's clearly a strong case to be made of a potential upside surprise.

So inflation I think remains by far the most important issue at play, balance of payment, lower oil prices clearly presenting a positive twist on the whole issue about current account, capital inflows remains strong. But if there is one key risk that I would like to point out, its really the policy setting, the policy mix and within that I think its much more concentrated on the potential RBI actions than even on the fiscal side.

I think that on the fiscal side, the budget is going to be a market friendly budget, we are likely to see the government sticking to its forecast for last year and again sticking to the FRBM targets for this year and at the same time. You eluded earlier to what had happened to call rates and liquidity conditions and over the last few days - just the whole speculation about an impending cut in SLR. To a large extent tells you that RBI perhaps is about to be exposed to a litmus test about its own credibility.

How do you read that the ordinance which came in on SLR? What did you expect the RBI to do on that front next and how does that stack up against the tight liquidity situation we have seen for the last few months?

I think its important to bear in mind that that particular issue has been with the Ministry of Finance since last year. The banking regulation got delayed in part due to some difference of opinion with the Left on some of the aspects of that amendment. So the government has decided to move ahead with that amendment on this particular issue about SLR.

The main reason for going ahead with that is to try and make the liquidity adjustment facility operationally better because what happened earlier in January was just call rate shooting up to 18% simply because banks who were short of funds, would go to the RBI for the borrowing facility but didn't have any collateral to offer. So the RBI said sorry, no show because RBI doesn't give un-collateralized lending and that just results in call moving higher.

I think the main motivation from moving faster on that particular ordinance is really to offer more flexibility. An unintended consequence perhaps of any reduction on SLR is going to be that loan growth lands up being at an elevated level for higher.

We have got interest rates, we have got SLR, we have got CRR, take your pick. So the RBI clearly needs to do a lot of introspection and decide on the key message it wants to send to the market, which is fairly confused at the moment.

What do you expect the Fed to do because the market seems quite split on whether or not there will indeed be that interest rate cut?

We have never been believers in terms of an interest rate cut; we think there is a prolonged period in Fed remaining on hold. We still think markets are going to be surprised by the underlying resilience of the US economy and towards later half of the year; the Fed move is likely to be up rather than cut.

With energy prices moving lower, that only strengthens the case of potential rebound on the consumer side. Just Friday's number on the retail sales out of the US, again a pretty impressive number. So this whole bearishness about US housing slowdown induced knock-on impact on US economy is definitely been exaggerated, so we this Fed is more on on-hold period for fair amount of time.

There was a surprise rally in the last quarter in terms of what happened with the rupee - how do you expect it to move this year and what is your call on it?

I think we still remain slightly bearish in terms of rupee outlook, the key risk obviously being what happens to oil prices and at least on our calculation there will be a $10 drop in global oil prices, adds about $6-7 billion dollars on a positive side as far as current account is concerned.

One of the interesting things we have seen in international trade data for October-November is a pretty sizeable jump as far as oil imports are concerned on the volume side. So despite lower oil prices, the oil import bill for India shaping up for the December quarter is actually large. So if this is maintained it obviously takes away the shine from positive impact of lower oil prices.

On the capital side still things continues to look good and so while there are good reasons to expect the rupee to appreciate, we do think oil related buying and a Central Bank that still maintains an asymmetric approach, i.e. it is going to intervene fairly aggressively to prevent the rupee from appreciating too much but at the same time if there are dynamics that push it to weaken it is not necessarily step in too much means there is still slight weakness in the rupee still to play out.

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