Inflation to hit 9.5-10% before peaking out: JPM Chase Bk

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

Q: First on inflation, what do you expect to see over the next 7-8 weeks?

A: The headline inflation over the year number will continue to climb higher, peaking somewhere near 9.5% or possibly 10%, before it begins its move down. There are several assumptions in this projection. But during the fourth quarter and then into the first quarter that is the January-March quarter, the headline OIA numbers should begin to look a lot better. The actual impact of the fuel price hike on headline inflation would be close to about 1%. No central bank would necessarily loose its cool and start using a sledgehammer approach to put inflation back in a box in 2-3 months. People need to bear this in mind when they start thinking about what the RBI or the government could possibly do.

Q: What do you think, the RBI will do because there is a general fear in the market now that, if not interest rates, another leg of CRR tightening is very much on its way?

A: The CRR is one thing that the RBI is unlikely to do now. There is no dollar inflow and we are no longer in a situation of excess liquidity whereby the RBI can justify hiking the CRR to take that excess out. In fact there is going to be a natural tightness as far as liquidity is concerned simply because there is no dollar inflow. The extent to which the RBI is trying to stop the rupee from weakening further, it essentially is selling dollars and taking out rupees. So there is a built-in tendency within the system for liquidity to tighten and this is what the markets are trying to decipher. More than the fear of rate hikes, it’s the expectations of tighter liquidity conditions that are making the markets a lot more nervous.  

Q: So working on that premise, they don’t move on rates - but they tighten liquidity, do you expect to see some kind of a relief across asset classes or not really?

A: The relief essentially would start coming in when there is a bit of a conviction that there is a response from the Central Bank. There is a lot of bad news on the inflation front till it is behind us and it would be difficult to get a clear signal on that until after the monsoon season.

There is a bigger problem here which the markets and investors are not focusing on. Whichever government wins the election, whenever they might be held, it would once again have to take a serious look, and try and solve the fiscal mess. This, at some point would again mean further price hikes would come through. Obviously the markets are not going that way and the election itself would have its own dynamics. But this is going to become a more serious problem. So what’s being done yesterday is at best a band-aid approach. They need to be solving or mitigating some of the symptoms and get into the root of the problem. It leaves a huge liability on the fiscal mess for whoever forms the new government.  

Q: So what are you working with right now in terms of percentage proportion of the fiscal deficit to the GDP, how much is it going to eat into it. You have had one of the more conservative GDP targets, are you scaling that back or holding 7% now?

A: No, I would still live with 7%, I am actually surprised that some people have gone ahead and marked up their full year numbers after the release of last year’s numbers which were to a large extent backward looking. The big casualty of the whole fiscal mess is really going to be on the investment cycle which was one of the firmest building blocks of the India story. The broader momentum is going to loose some pace and I still think the consensus numbers on growth will continue to be high. The RBI has a 8% to 8.5%  inflation forecast which appears rather optimistic. Therein lies a bit of a dilemma, the government wants high growth but it also wants low inflation. A good proportion of the current inflation spike is not really demand driven. You will begin to see a second order impact of these higher oil prices.