Inflation to remain above 7% for sometime: Yes Bk

Shubhada Rao, Chief Economist, Yes Bank, said inflation is going to remain above 7% for some months to come.

A: If not with a double digit, we are definitely going to be living with an above 7% inflation number for some months to come. Price pressures are being felt across groups be it primary or fuel. Now, you have manufactured product prices being essentially driven by iron and steel and the products thereof. These are also being prompted by global commodity prices, be it global agriculture commodities or base metal prices. I don’t think we have a very comforting scenario to project where inflation numbers are concerned. They are going to remain well over 7% for some time. It is going to be a great challenge to bring them down even to 6.5%. This with some of these fiscal measures that have been announced in the last two weeks or so will definitely have an impact. It is going to be fairly muted, there is not going to be a dramatic result of inflation being brought down at around 5.5%.

A: This 8.6% was a pleasant surprise because we ourselves were estimating a fairly lower number at 6.5%. So, 8.6% did come as a good positive surprise. Capital goods after the previous month’s aberration of 2.3% has now gone back to its double-digit growth of 10%. The consumer durables segment has for seven out of 11 months posted negative growth numbers and has come out with a positive number this month.

These two would essentially be the drivers of this overall IIP growth. Am I bullish about it? If I look at the capital goods data very closely, all the components related to power were doing exceptionally strong and robust for quite a few months. Since the last couple of months, we have seen a plateauing of these numbers. That is one of the reasons why we see that growth that did post around 20-30% YoY has now started trending lower, definitely below 17% and 15%. This month growth is seen at 10%. So, power related equipment within the capital goods segment is seeing some plateauing, and deceleration. This month definitely was a positive in terms of oil exploring platforms, rail related transport - wagons, and diesels, among others. So, these capital goods have done well. Industrial machinery and textile machinery have also done well.

But if you look at the overall composition of capital goods, I would think there is some sort of growth fatigue. We are definitely not going to see a 20-30% growth.

Q: Let us look at what the government is doing right now to tame inflation. On the fiscal side, you have seen a whole host of policy measures. What do you expect the RBI to do now? Do you still see a possibility of a CRR hike much before the policy meet?

A: I definitely don’t see a CRR hike between now and then. In fact, RBI has stated its intent very clearly since last week that they would prefer to mop up excess liquidity through MSS.

Clearly, there is excess liquidity in the system, if one is to look at the reverse repo auction amounts. That is primarily being triggered by a combination of factors: one the government’s spending has picked up. Two, we have seen RBI intervening somewhat in the forex markets. So, combining these one is seeing a fair amount of excess liquidity in the system.

RBI would take a decision about CRR. We do think it is a possibility on the 29 April and not before that. We would prefer to see what kind of capital flows are being brought into the system.

We have seen that on account of these RBI has intervened quite frequently in the last few days.

Q: Do you see some sort of peer pressure settling in because globally there is always the trend of a rate cut? Do you see peer pressure setting in for the RBI to may be take that drastic step?

A: I would really not think so because of two things. The Governor has always maintained that at any given point in time for policy announcements there are either global factors or domestic factors to consider.

At this point in time, the weightage for the domestic factors would be the prime consideration for policy formulation. The domestic factors are high inflation and moderating growth. Definitely, the RBI would want to stay ahead of the curve.

Q: On the one hand, the Finance Minister wants to put more money in the hands of the consumer and on the other hand the RBI wants to pull money out of the system. Isn’t there a dilemma here?

A: Definitely, when the FM went into his announcements at the Budget time, I don’t think a lot of us anticipated such a sharp uptick in inflation so quickly. We did expect inflation to trend much higher over a 5.5-6%. That is what is currently prevailing. So, my sense is that at that point the consideration was also dampening the consumption story that the FM was looking at. He would definitely look to revive consumption and growth. So, at that point, expenditure programmes were devised very clearly to put money into the hands of the people through revision of income tax slabs and Sixth Pay Commission and so on. Now, the dilemma is so much more accentuated now because inflation is so much higher and likely to remain so for quite some time. So, it is clearly a policy balance and it is a fine balance that the RBI has to manage.