Inflation may hit 8% in short-term: HSBC

Excerpts from CNBC-TV18’s exclusive interview with Peter Morgan:

Q: What has been happening with the rupee - what kind of levels you have penciled in and do you think this year is going to be bit different from the ones we have seen in the past for the rupee?

A: It certainly looks different so far; there has been a change in sentiment about the outlook for inflation and the implications about that for currencies. So we have seen a number of Asian currencies falling back on concerns about higher inflation particularly those current account deficits and India has been one of those.

We are still positive on the rupee going forward; we think that the monetary position of the Reserve Bank of India (RBI) is much better than some of the other Asian countries; they have already tightened quite a bit. So if inflation was to pick up, we are confident that they will tighten further. We think rupee is still pretty well underpinned - so we do look for some strength in the rupee by year end.

Q: What is your call on inflation - it’s been quite stubborn in India for the last 4 weeks in that 7 to 8% zone, do you expect it to inch higher and are you in that camp which believes that after the next 3-4 weeks inflation will gradually start easing in India?

A: We think it will gradually be creeping up, we do look for inflation to hit past the 8% range before too long and this is primarily the combination of the weakness of the rupee and the strength of commodity prices. So there is a not a lot the RBI can do about that in the short-term but if we do see a turn around in the rupee later on, that would help ease some of these inflationary pressures.

Q: What is your call on growth in India because we have had a set of weak IIP numbers once again, are you working with that 7.5%-8% number or lower than that in 2008?

A: We have had a below consensus forecast for some time, which is below 7% and we are sticking with that.

Q: Your colleague from HSBC last week made the point that this 7% GDP doesn’t factor in crude at USD 125/bbl and if commodity prices stay where they are, do you think there might be a risk of that figure actually getting marked down a little bit again?

A: That is only possible if we do see an elevated inflation rate and atleast for the time being by the RBI. In addition to that, there is some risk of downward revision of that number. But I think we are still reasonably comfortable with the figure.

Q: What is the way to be prepared for this by way of monetary policy action? What more would  you expect from the RBI because of what has happened both with inflation and perhaps the way currency has moved as well?

A: We are not looking for any interest rate hikes this year but we think it’s quite possible that there will be a hike in CRR and of course if inflation does pick up further, then I think a interest rate hike cannot be ruled out either.

Q: How are you accessing the global situations - there seems to be growing belief that US might actually avert a recession after the kind of economic numbers which have been tumbling in, what is the base case scenario that you are working with for the next 2 quarters?

A: We are expecting some pick up in the second half as a result of the fiscal stimulus programme. So I think there could be a big of bounce in the second half. However, we believe this is still temporary and there could be a renewed slowdown in the H1 (first half )of next year. We will have a kind of W-shaped pattern in terms of US slowdown from here.

Q: Would you go as far as to say that the kind of confidence which equity markets around the world are exuding now is a little stretched or misplaced about the strength of the global economy?

A: We think there could be some further disappointment. The recovery in the market we have seen so far is consistent with our expectation that things could turn a bit in the H2. But we think that is not necessarily the end of the game. If one looks at the Fed’s forecast, they are expecting essentially a return to trend growth but we think that is still over optimistic.