Inflation may hit 14% by September: Kotak Sec

Mridul Sagar, Chief Economist, Kotak Securities said that inflation concerns are still prevalent. He feels that even though liquidity is scrunched, inflation is still heading towards the 14% mark by September and so RBI may take the necessary steps in order to curb it. He added, “In these circumstances, sucking the liquidity out in a go would be difficult, but interest rate signals are important.”

Excerpts from CNBC-TV18’s exclusive interview with Mridul Sagar:

Q: Do you think inflation is rising but at a slowly rising trajectory?

A: One should not be misled by last week’s flattish inflation. There were some base effects and reduced vegetable and manufactured goods prices. Over a period of time, we see a trend wherein manufacturing prices will begin to rise. Unlike the past financial year, manufacturing goods have accounted for almost 40% of the overall increase in the WPI in this financial year so far. There’s another 40% coming in from fuel and the remaining from the primary commodities. Even if one takes processed food out of the manufactured goods, we still had a substantial rise in manufacturing prices in this financial year so far.

Q:  Are you saying that you haven’t seen inflation peaking off just yet and if that’s the perception, even with crude remaining below USD 125/bbl you would expect a hike on July 29?

A: That’s a call the Central bank would take. Inflation concerns are apparently still prevalent. Liquidity is scrunched, but given that inflation is still heading towards the 14% mark by September, the necessary steps could be taken.

Q: What are you expecting on the liquidity front? Are you expecting a CRR and Repo or are you expecting only one of the instruments.

A: The way the things are, the Central Bank looks at signals and then takes a more medium term stance. But considering the current state of liquidity and the kind of black numbers like strong repos of Rs 40,000 crore plus on an average fortnightly basis clearly indicates a deficit of Rs 30,000 to Rs 35,000 crore. So, those numbers would guide the monetary policy. In these circumstances, sucking the liquidity out in a go would be difficult, but interest rate signals are important.