Nov 15, 2012 06:18 PM IST | Source: CNBC-TV18

See limited room for RBI to cut rates now: HSBC Global

Leif Eskesen, chief economist -India & ASEAN, HSBC Global Research said, food price inflation may have come off due to high base effect and that the Reserve Bank of India (RBI) will take comfort from ease in core inflation.

India's wholesale price index (WPI) rose a slower-than-expected 7.45 percent in October from a year earlier.

In an interview to CNBC-TV18 Leif Eskesen, chief economist -India & ASEAN, HSBC Global Research said, food price inflation may have come off due to high base effect and that the Reserve Bank of India (RBI) will take comfort from ease in core inflation.

However, he sees limited room for the RBI to cut rates at the moment.

"The capacity in the economy is still tight despite the slowdown in growth because the slowdown has been led by the supply side. The loose fiscal policy stance is also still something that limits the scope for monetary policy easing. We are looking at 50 bps in total next year," he elaborated.

Below is the edited transcript of Eskesen’s interview with CNBC-TV18.

Q: What did you make of the inflation figures?

A: Yes, it was a positive surprise. The key reason why there was a decline was that the food inflation eased. Also, encouragingly core inflation eased, if you look at manufacturing and stripping out food and beverages etc. that eased from 5.6 percent to 5.2 percent. So, it is positive developments both in terms of headline and in terms of core inflation, so the RBI will take some comfort in that.

When it comes to the decline in food inflation, a part of that could be related to base effects that are tied up with the shifting timing of the Diwali. Last year in 2011 Diwali was in late October, so some of the seasonal increase in food prices took place during October.

This year Diwali was further into November, so more of that increase in festive demand for food and therefore in food prices would have taken place this year November rather than in October of last year. So, that could have had an impact in terms of lowering inflation print from food inflation side. That is important to factor in.

Historical inflation numbers were revised up again in August, from 7.5 percent roughly to 8 percent. This suggests that the inflation prints in September and October have been most likely north of 8 percent, so it is not exactly anywhere near RBI’s comfort zone. The supply side is been the key driver of the slowdown in growth and that has left capacity relatively tight.

We see underlying inflation pressures relatively firm still. We could also start to see in coming months some of the spill over from the hike in diesel prices filtering through to core inflation pressures. It is one observation, one development in the right direction, but one observation does not make it trend. We need to see more progress in terms of inflation risks coming off and more progress in fiscal consolidation in terms of concrete measures before the RBI will warm up to rate cuts.

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Q: Is it safe to say that the inflation tick this time around is not low enough for the RBI to move in the December policy and one would have to perhaps wait for the January policy before any rate cut takes place?

A: Yes, one observation is not enough in itself. There are also a couple of concerns about part of it could be because of base effect because of Diwali. Secondly, there are sort of upward revisions to historical numbers that are taking place. The CPI number that came in recently is hugging 10 percent effectively.

So, that is suggestive that broad inflation pressures in the economy are still quite firm. Yesterday’s reading of inflation number by itself is not enough in my view to change RBI’s perspective. Possibly, we are moving into next calendar year before the grounds are fertile for rate cuts.

Q: How do you approach this going into next year? If your belief is that 2013 is when we see the cuts, are you in the camp that believes between January to June it could be as much as a 100 bps or do you think it will be a very cautious step-by-step approach from Reserve Bank?

A: No, I certainly belong quite happily to the later camp. There is limited room for RBI to cut policy rates. The capacity in the economy is still tight despite the slowdown in growth because the slowdown has been led by the supply side. The loose fiscal policy stance is also still something that limits the scope for monetary policy easing, but there needs to be more progress on that front.

Ultimately what is necessary to raise growth in India to address the inflation problem is supply side reforms, so that is where all the policy ammunition has to be concentrated. There is a little bit of room for rate cuts, but we are looking at 50 bps in total next year.

Q: Aside from these indicators in terms of inflation and what is happening on the industrial side, the big concern is how much growth expectations have dropped down by. Have you had reason to scale down your GDP expectations even more or are you holding targets there?

A: We are still looking at 5.7 percent for this fiscal year. As far as the IIP number is concerned, we assign a lot of that to the volatility seen in one particular segment - capital goods. The other indicators still suggest that growth is stabilizing now.

We are still looking at a quite gradual recovery in the second half of the fiscal, but nevertheless one that is sort of slowly going to come through. We are quite comfortable still with the 5.7 percent growth forecast we have for this fiscal.

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