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(Interview Transcript)
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Inflation stands at 7.14% versus 7.41% for the week ended April 5 . The market had estimated it at 7.3%. This is the first weekly decline in inflation after eight weeks of rise.
Robert Prior-Wandesforde, Senior Asian Economist at HSBC Holdings said that he expects the WPI (Wholesale Price Index) to go to 8% at the least and higher if commodities keeps rising. He said that Dr. YV Reddy’s comments have been hawkish. The CPI (Consumer Price Index) could reach close to double digits soon, he said. He added that we would see further action form RBI and the government as well.
A Prasanna, Chief Economist of ICICI Securities expects the GDP growth to slow down to 7.5%. He also feels that the volatility in IIP numbers will die down. There is not much scope for currency to appreciate, he added.
Shailendra Bhandari, MD of Centurion Bank of Punjab sees the interest rates going down in H2. If the economy does not pick up, the inflation could ease off later this year, he said.
Sanjeev Sanyal, Regional Economist of Deutsche Bank-Asia sees a small chance of a CRR hike. He expects inflation to plateau. The GDP growth is beginning to slow; commodity prices are reaching their peak, he said. Sanyal expects Chinese growth to slow down to 9.5% and Indian GDP growth to be just above 7%. He sees inflation to be at an average of 5.9% this year.
Shubhada Rao, Chief Economist of Yes Bank expects RBI to hike the CRR and she said one cannot rule out an interest rate hike either. Rao also added that there may be a price control in steel and some commodities as well.
Possibility of CRR and repo rate hike:
Bhandari said, “The CRR hike, if it happens does two things; (1) it sucks money out of the system and this is not only on incremental deposits but the stock of deposits – but what it also does is it makes the cost of deposits more expensive. So any sensible bank would try and protect its margins and would perforce increase its lending rates. There maybe some amount of moral pressure which could happen on the public sector banks not to increase them but economists would argue that if there was a CRR hike, there would need to be increase in rate - not a lot 5-10 bps, but there would need to be an increase in rates to protect margins.”
If there is a repo rate hike, Bhandari said that it would be interesting. “Obviously this is a signal and there is common sense in banking. If there were a signal in high interest rates, it would be much easier for the public sector banks to say, ‘We are sorry, we cannot reduce PLR rates and maybe we should actually increase them.’ So if that signals were to come and it’s probably less likely then the chances of interest rates being increase are substantially more. If it’s just a CRR the banks may have to just absorb that.”
Wandesforde added, “I think Governor Reddy’s comments yesterday were pretty hawkish, and I wouldn’t be at all surprised if we didn’t just see a CRR hike. But we see a Repo rates increase as well. So whether it is a sort of something bigger opportunity and much would depend on how inflation pans out. And my view is that the price inflation is getting around to 8% at the very least and could rise further than that if commodity prices continue to increase and will remain very higher as well. I think it is about to drop back sharply any time soon and also consumer price inflation which is yet to turn and is about to and that could rise substantially and it is quite possible that Consumer Price Index (CPI) inflation could reach close to double digit and is very close in a short period of time, and against that background, chances are that we would have to see further action, not necessarily just from the RBI but from the government as well. The danger in the action becomes more and more panicky as the general action approaches and the Wholesale Price Index (WPI) inflation remains at these kind of levels, if not higher.
Rao said that one is yet to see the fiscal measures in full play yet; that is, their impact. “ From a policy perspective, it is going to be an effort from both the Ministry of Finance as well as the RBI. We do see CRR hike possibility. But the recent policy pronouncements from New York do not even rule out a rate hike because if we are going to actively manage the demand conditions, given the supply constraints; I think that somewhere between the lines also suggest that a rate hike cannot be ruled out.”
She wouldn’t be surprised even if there is a CRR as well as repo rate hike. Rao said, “Inflation management is on the top of the agenda for both and 7-7.5%, for a price stability point of view definitely, will hardly be comfort providing to the markets or to themselves.” She also expects government intervention now. “The initial indications are that they would have some kind of price controls on items like steel and cement, which are retrograde steps but the situation may perhaps warrant the Ministries to get into the action because they are very desperate to get the inflation numbers down, so I do not rule out some more measures on the price controls part of it.”
V Vaidyanathan, ED of ICICI Bank said, "Fund inflows are actually slowing down. To top it up if you take out CRR, increase the repo rates, and you do all at the same time to actually suck out a lot of liquidity from the system; so we should not really jump to the conclusion at this stage that it will happen - we should really wait to see the numbers. We should also remember that this monetary policy related interventions actually have a lagged effect. It is actually a fiscal-related effect that has almost the instant effect. So even if we actually see these monetary policies being taken, it could be a while maybe a three-four months or six months before we actually see the impact of this on the inflation numbers.”
Gaurav Kapur, Senior Economist at ABN AMRO Bank said, “It was the base effect which pulled the number down because the Wholesale Price Index (WPI) jumped up from 226-226.6 and there were about 56 bps favourable base effects, statistical base effects. So the number by and large is inline with what I had expected. But that said pressure is still pretty much there; the breakdown metal prices continue to lead the charge in inflation, food product prices particularly edible oil prices seem to have eased off but globally prices are under pressure, rise futures have touched a new highs. So its still a very charged up scenario as far as inflation is concerned. This is certainly not a trend that is going to set in.”
Prior-Wandesforde said, “We are still expecting 7% GDP growth and we have been expecting that since we started forecasting ’08-09. For ’09-10, we were looking for a recovery now. Of course, one implication of monetary tightening particularly if we see series of rate increases is that recovery in ’09-10 may begin to look rather shaky and we may start up to revise down those numbers. I think this brings us to wider point and it’s been touched already that there potentially here a difference between what the RBI should be doing and what it will be doing. The impact that monetary tightening will have on WPI inflation is extremely limited. This is a commodity-driven phenomenon in large part and if interest rate rises, it’s not going to do anything to stop that. The reason why the RBI is doing anything at all is just to be seen that we are doing something to prevent inflation expectation from rising. But I think the bigger impact of this monetary tightening will be on growth 12-18 months down the line then will actually be on inflation.”
Prasanna said, ”Our view is that probably February was kind of overstated; the truth lies somewhere between the January and the February numbers. So the trend of slowdown is intact and we will see more of it in the coming months. Probably what we could see is a volatility, which we saw in the IIP numbers might die down. So probably headline numbers could print around 8% on a consistent basis. Having said that, some of the other indicators have turned up over the last few months, particularly the freight movement as well as cement despatch - probably we need to watch it a bit. Maybe truth is a bit more resilient than what many are thinking. But our base case scenario is still for GDP growth to slowdown this year to around 7.5%.”
Sanyal also sees a slowdown in GDP growth. He said, “We expect growth for China for the year as a whole to go down substantially to 9.5%, which you can imagine quite sharply down, from last years 11.5%. Even in India, we expect the growth to fall from the 9% range to little over 7% this year, so fair amount of slowing is coming. The US has also slowed; we expect it to remain quite muted this year." He added, "We expect GDP for the current year to be around 7.2%. Inflation we think will average out at around 5.9% or there about. So that means that by the end of the year it will have fallen past that point, so it’s a significant decline on YoY basis by the end of the year.”
Yiping Huang of Citigroup feels that food prices will stay at relatively high levels. “Normally supply-demand would have responded to high food prices in the market but unfortunately when we talk about demand and supply of food the response is much slower, much more limited, so I suspect we are going to see food prices stay at elevated levels in the coming year. The prices probably will be sticky but
Sanyal said, “Commodity prices, particularly energy prices have come a far-far long way from what we would have if you were sitting 2-3 years ago and trying to forecast. So in that sense, they have been a huge surprise, and nonetheless we do think that the growth in the US is slowing, and even in Asia while the growth is still very strong it is slowing. So eventually we do expect that it is filtered through to commodity prices. Also, the fact remains that inflation is exceptionally high and that is important, because if you go back to year ago and India did go ahead and tightened very aggressively last year; and it did for a while see inflation fall and now the inflation has come back with a vengeance not withstanding this. So basically you have a situation where inflation is a major issue and Central Banks across the region is having trouble dealing with it.”
Kapur thinks that cooling off is already being witnessed and is one of the biggest contributors to inflation is edible oil prices.
“If you see the data for the last few weeks now and even prices after this reported week edible oil prices have eased off, and I think food grain prices also should from here on, if not erased but perhaps stabilized because wheat harvest is going to hit the market. Hopefully monsoon as was forecasted or as it was said yesterday monsoon is going to be better than last year, which should help control inflation expectations, but metal prices is where there is lot of uncertainty and price pressures is still fairly strong there. So I think if I were to look at it food prices would ease off first and perhaps then metal prices, but all said and done I think the global price scenario is also equally critical. The commodity prices this week again because of the weak dollar, it has seen rally in number of commodities again. So the global commodity price scenario is still not favourable while we might see on the back of government action, we are likely to see some impact of that on food prices and metal prices would still remain the main driver of inflation,” he said.
Effect on markets:
Arpit Agarwal, Head of Research, Arihant Capital Markets said, “If you see actually inflation at 7.14% is still imported inflation. So, inflation has cooled down a little bit from last week, but it is still high over 7% and yes the market has got some cheer that inflation is actually going down. But I think the government is really concerned about inflation and we could see more steps going forward. On the banking space, the PSU bank space is attractively valued; most of these stocks are available at very attractive valuations. But April 29 is the credit policy and we can see some monetary measures to contain inflation, which could actually have some short-term impact. But yes, long-term valuations look good.”
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