Inflation may slip below 8% by Dec-end: UCO Bank

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Inflation may slip below 8% by Dec-end: UCO Bank

November inflation eased to 9.11% (MoM) versus 9.73 % in October. Arun Kaul, chairman of UCO Bank says, if the wholesale price index remains 156.90, inflation is likely to come down below 8% by December-end and below 6% by March.

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November inflation eased to 9.11% (MoM) versus 9.73 % in October. Arun Kaul, chairman of UCO Bank says, if the wholesale price index remains 156.90, inflation is likely to come down below 8% by December-end and below 6% by March. "This should happen primarily because of two things. One, the base is moving up. Second, food inflation is substantially coming down," he explains.

In an interview to CNBC-TV18, Kaul says, there are three risks to inflation- oil prices, fiscal deficit and the rupee depreciation. According to him, RBI has to carefully balance between these things.

He further says, markets players are of the view that CRR cut is very much on the anvil. "A CRR cut will give a signal to the market that RBI is going to change its monetary policy stance."

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: How are you reading the inflation number? What are you expecting from the Reserve Bank of India?

A: 9.11% is slightly higher than what the market expected. Expectations were somewhere between 8.98% and 9.02%.

Going forward, if the wholesale price index remains 156.90, inflation is likely to come down below 8% by December-end and below 6% by March.

This should happen primarily because of two things. One, the base is moving up. Second, food inflation is substantially coming down. So, going forward the inflation will substantially come down. Maybe today it's slightly higher than the market expectation.

Today, there was knee-jerk reaction in the market. You saw the bond yield going from 9.40% all the way up to 9.49%.

Let us look at the risks to inflation. There are still three risks to inflation. One, crude oil prices continue to be high. Second, fiscal deficit is likely to be higher than projected earlier. Third, rupee depreciation leads to costly imports, which could put some pressure on inflation.

As far as the liquidity is concerned, I think there is a need to induct liquidity in the system. If you look at the repo figure, banks are continuously bearing between Rs 80,000 crore and Rs 1 lakh crore for the many weeks. On December 15, there is outgo of tax. That will again add to the liquidity constraint.

Market is feeling the pinch of liquidity and this is going to become much more severe. That means RBI has to address this liquidity issue.

What will the RBI do now? Market feeling is probably CRR will be more enduring. But the CRR cut also gives a signal to the market that RBI is going to change its monetary policy stance. Markets players are of the view that CRR cut is very much on the anvil.

Coming to repo rate cut, yes, if inflation starts going down, it makes a strong case for rate reduction also. There are three risks to inflation- oil prices, fiscal deficit and the rupee depreciation. So, RBI has to carefully balance between these things.

Q: Core inflation is still up from 7.6% to 7.9%. Do think the RBI could be eyeing core inflation in the near-term rather than taking the entire number, which is going down with the base effect?

A: You cannot ignore the fact that inflation per se is likely to go down. The objective of raising the interest rate was to curtail demand. That they have done very successfully. We will have to wait and see what RBI indicates in the credit policy.