No reason to see inflation exceeding 5% near-term: Experts

DK Joshi, Chief Economist of CRISIL believes food inflation is behaving as expected. He expects moderate food inflation this year. While there is some worry on fuel front since crude has been rising, the good thing is that the increase is only gradual.

Joshi believes overall developments in the economy have moderated risks of inflation exceeding 5 percent.

On the impact on bond yields, Vivek Rajpal, Rates Strategist at Nomura India says yields are likely to have not yet bottomed out. The pressure of quantum of money in the system following demonetisation might push yields lower, he says, adding, as of now his forecast on yield is 6.5 percent with downward bias at least until December.

Dipan Mehta, Member of BSE and NSE also shared his views on earnings forecast.Below is the transcript of Shubhada Rao, DK Joshi, Vivek Rajpal and Dipan Mehta’s interview to Latha Venkatesh on CNBC-TV18.Q: First thoughts. Vegetable inflation is the one that has really taken it down. If vegetable prices fell by 7 percent last month, they have fallen by a further 5.2 percent this month and that obviously, has contributed to the 3.3 percent food inflation and the 4.2 percent overall inflation.Rao: Quite right. We were anticipating a 4.2 on the headline consumer price index (CPI) and that has come pretty much spot on. And we were anticipating, although I must add that month-on-month (M-o-M) sequential momentum was expected to pick up in items like pulses and vegetables, but year-on-year (Y-o-Y) inflation, because of the favourable base was definitely looking much lower. This has come in much lower definitely. We had anticipated some of the components actually in a sequential manner to see a pick up on account of the festive related firming of prices typically seen around Diwali and pre-Diwali time. But pretty much spot on, despite fuel having gone up, both diesel as well as petrol had moved up by 2 percent odd, in rupee terms, crude oil prices has moved up by 11 percent. What we were also anticipating was personal care and those kinds of items also showing some firming up typically associated with festive season. But having said, base definitely has had some role to play. But most important, as you rightly said, it is the food which adds the positive favour.Q: Mr DK Joshi, your thoughts?Joshi: The food inflation, we have been also saying that it will come down and it is behaving as expected. For this year, we should expect moderate food inflation. The only worry is a little bit on the fuel front because the crude prices as well as the commodity prices have been rising. But the good news is that they are rising very gradually and most of the forecasts are pointing towards a gradual increase. So, that would also not be a major cause of concern. I would like to look at the core inflation number, as and when it comes out because in the month of September, even though the overall inflation did come down, core inflation edged up a little bit. So, that will be an important monitorable. But given the overall developments in the economy, the risk of inflation exceeding 5 percent average is very low. Central bank had pointed out that there are upside risks to inflation. Those risks have moderated because of recent developments.Q: 4.2 percent, coming lower than the CNBC-TV18 guess, or rather, poll of 4.3 percent. And of course, much lower than the previous month’s inflation as well. Your thoughts on how bond prices will be impacted? Will they be impacted at all or have they already indicated lower levels?Rajpal: Bond markets are reacting to the fact that Indian banking system will soon be flooded with cash and this is the first time when we will have such a big amount of liquidity in the banking system. As far as the inflation is concerned, it was also clear even after the last reading that the upside risks to inflation which RBI mentioned will go away. So in a way, today’s data kind of reinforces that view. My personal bias is that we have not yet seen the bottom in yields and the pressure of quantity of money is something which will continue to bond yields lower. So, this data, if anything reinforces the view that there are no upside risks to inflation and what we are seeing is that liquidity continues to push yields lower. And I think this trend will continue for some time.Q: Mrs Bhattacharya, the Chairman of SBI was making an important point. She said, while we are flooded with deposits, we must expect that people will also withdraw it. So they will be able to cut rates only after they get an idea of what is the stable amount of extra deposits that they have got. Clearly, ideal cash will come in and not go away in a giffy, but some of it will. I do not know if you could quickly calculate the core inflation. I gave you some of the numbers, but are you getting a sense that core inflation is still a niggling worry? Rao: Core inflation has been sticky. It has been somewhere between 4.7 and 4.9 levels and that is essentially the story where RBI has also been articulating on. And of course, in this core inflation, we need to also take into cognisance, in personal care which you said is 7 percent plus could also be incorporating the gold prices that have moved up. In personal care, that has a serious amount of influence. So, we need to actually track these sub-components within miscellaneous and which add on to core, but yes, the core inflation has not really seen very clear signs. The point you made earlier in terms of going forward, downside risks definitely do remain in our analysis, for inflation. Remember RBI had put 5 and 5.3 in the third and fourth quarter, which we believe has a serious downside of almost 40-50 basis points. End March, we expect 4.5 with some downside and in this, average for the full-year could be 4.8 and even below.Q: What would you work with for the January-March quarter?Joshi: I would say it will remain contained within 5 percent. It is tricky to forecast inflation. It surprises so many times, so I would not risk giving a point estimate at this juncture. But two things, one is our average inflation forecast for the full fiscal year is 5 percent which now we will probably scale down given the impact of demonetisation and a little bit of demand destruction that is expected. That will pull inflation down a little bit. So, there is clearly a downside risk to the forecast of 5 percent average inflation and the last quarter will see between 4.5 and 5. That is the number that we will work with.Q: What do you think will be the kind of direction in yields? We are standing at about 6.65 at this point in time. What do you expect by December 31? What do you expect by March 31?Rajpal: Our expectation is that as far as 10-year bond yield is concerned, we will see something like 6.50 kind of levels. But, the bias is because of this access liquidity that we will see lower yields. There are two aspects to it. Number one is what this demonetisation scheme is doing is it is improving banking system liquidity. Now this will push the front-end rates lower, so probably the yield curve will see bull steepening kind of a pressure. And then, of course, there is the pressure in the global bond yields. Having said that, I would still think that India bond markets can remain very well de-correlated with the rest of the world. Nevertheless, I would still expect some bull steepening and probably 6.50 is a reasonable expectation with downside risks.Q: 6.50 by December end?Rajpal: Yes.Q: What is your sense? We have got an inflation number which is lower than expected at 4.2. It is a 14-month low. Do you think there is anything to react to this or do you think the markets are anyway pricing in big deposits and therefore rate cuts from the banking system?Mehta: It will have a salutary effect on the markets and presently, we are all grappling with the effects of the demonetisation move which has been done. And till we see lines outside the banks and slowdown in sales and empty restaurants and empty malls, that is going to effect the short-term sentiment. But, this particular inflation number has come before the demonetisation move, so the next number would be even lower. So, I think the RBI, in order to kick-start the economy again and thwart our some of the effects of demonetisation would go in for aggressive interest rate cut. And that may not have been completely priced in at this point of time. So, it is a great news for the markets, but I do not think it will pay heed at least tomorrow and the kind of pressure which we saw today in the momentum, that should continue for at least a couple of more trading sessions. So, we are getting around to forming a bottom, but all these data points certainly will help, but they are not going to be game changers by themselves.Q: So, you expect 8,200 to hold, the Trump day low?Mehta: It will be tested. It is very difficult to call at this point of time. And I can see, today some amount of resolve, as far as retail investors, also is breaking. When the Trump announcement came and even the demonetisation move after that, there was still a lot of appetite from retail investors and today, that is missing and I have not got as many phone calls to buy.