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Aug 06, 2013, 01.38 PM IST | Source: CNBC-TV18

Don't see CPI below 7% in next six months: Morgan Stanley

Unfortunately, so far one has not seen a clear focus from the government to control CPI inflation. Therefore, it will go down, but it will still be around 7-7.5 percent by March ’14, Chetan Ahya, Asia Pacific Economist, Morgan Stanley said.

Chetan Ahya

Economist, Morgan Stanley

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Chetan Ahya, Asia Pacific Economist, Morgan Stanley does not see the consumer price inflation (CPI) coming down below 7 percent in the next six months despite government taking control of food prices, which is the prime indicator for the CPI index.

Also Read: Output in emerging market economies contract in July: HSBC

Speaking to CNBC-TV18 about the falling rupee, he says the currency depreciation pressure will continue due to high CPI, wide current account deficit and rallying US dollar.

Meanwhile, Ahya believes if the GDP growth for the next two quarters is 5 or sub 5 percent then the risk of another year of sub-5 percent growth increases significantly.

Below is the verbatim transcript of Chetan Ahya's interview on CNBC-TV18

Q: The rupee in quite a spot while you were negotiating traffic it has negotiated its way to 61.5 per dollar. What is the sense you are getting, will this weakness last for the entire year?

A: I would watch three key indicators for the direction of the rupee. Firstly, what is happening to the consumer price index (CPI) inflation in India, secondly, the current account balance which we can assess on the basis of what is happening to the trade deficit on a monthly basis. Thirdly, what is happening to the US rates and the dollar.

The reason why I am mentioning these three indicators is because in India we run a very large current account deficit (CAD) of USD 80-90 billion and want foreigners to fund it. But when they come to India they get zero real returns because CPI is very high at about 9.9 percent. So, we will continue to see currency depreciation pressures as long as the CPI is higher than 7 percent. CAD is higher than 2.5-3 percent and the US dollar and the US rates are rising. Therefore, these three combinations would be the indicators you would want to watch to assess when the rupee will stabilise.

We don't think CPI inflation will come down to 7 percent soon in the next six months and at the same time we don't expect the CAD to go down to 2.5 percent. In the next six months these currency depreciation pressures will continue to the extent to which we expect the dollar also to continue to rise in that period.

Q: Do you think CPI inflation could break down by the end of 2013 considering the huge cuts in growth and big tightening steps from the Reserve Bank of India (RBI) and maybe more is to come?

A: We expect inflation to moderate for the reasons you mentioned but we also need some other measures along with that which the government is beginning to take to control food price as CPI inflation is primarily driven right now by food. To the extent to which the government has started to work on it, it will help but they will need to do a lot more and keep a focused approach to control inflation.

Unfortunately, so far we have not seen a clear focus from the government to control CPI inflation. Therefore, it will go down but it was still be around 7-7.5 percent by March ’14.

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