Robert Prior-Wandesforde of Credit Suisse, in an interview to CNBC-TV18, said he expects the RBI to cut the repo rate by 25 bps on March 19 and another 25 bps reduction can be expected on May 3.
The Credit Suisse expert said the WPI may go below 6 percent in March and continue to fall thereafter, hence any talk of stagflation would fade away.
Below is the edited transcript of the analysis on CNBCP-TV18
Q: What do you expect the wholesale price index (WPI) inflation to be? How will the money market react to it?
A: There are expectations of another downside surprise on inflation. There have been four surprises in succession. Our fingers are crossed for a fifth partly on technical reasons. The WPI inflation in February 2012 was actually quite high and affords an easy base comparison.
I would be surprised if the core inflation fell. That would be extremely pleasant news. I think the money markets will feel a lot more confident about a reduction in interest rates on March 19 after the shock caused by the Consumer Price Index (CPI) data announced earlier in the week.
Q: What course of action do you expect the Reserve Bank of India (RBI) to take next week?
A: We expect a reduction of another 25 bps and a further cut of 25 bps at the next monetary policy meet on May 3. We maintain our view that repo rates will eventually fall down to 6.75 percent, so a 100-bps cut is expected. Inflation obviously is a key determinant, but perhaps what is more important is the extent of the growth shock.
The December quarter growth of 4.5 percent is very, very poor. To think of a 7.75 percent repo rate with growth at 4.5 percent seems out of the ordinary. But I think rates should and will come down with the finance minister sticking to the goals set in the Budget which has gone down reasonably well at the central bank.
Q: What kind of commentary do you expect to hear on the CPI from the RBI?
A: Whenever the RBI has cut rates, which has not been that often, the reference to the CPI has been very minor. But I suspect the RBI commentary will downplay its significance to a certain extent. Though it can be ignored, the RBI will reiterate greater focus on the WPI inflation.
Q: Is the risk of the economy heading towards stagflation very high?
A: No, not particularly. First of all, the WPI the inflation has been coming down for a few months and is well below its recent highs. I estimate the WPI may well be below 6 percent in March and continue to fall thereafter. I also think that growth is going to pick up in 2013-14 but the March quarter is going to be difficult with the government tightening spending even more than it did in the September quarter and the rate growth might be poor.
But with very little in the way of fiscal consolidation, money market interest rates down, government reforms boosting investor confidence and exports starting to pick up, the growth picture looks better. In three-to-six months' time any talk of stagflation would have actually faded away.