Good rains may top off inflation: DSP ML

According to Indranil Sengupta , Chief Economist of DSP ML , the 5% change in agri-price will sway Inflation by 150 bps. On the other hand, he believes that the fuel hike may not take inflation to over 10% right away. He said, the 5% hike in petrol, diesel prices will raise overall inflation by 40 bps. 5% increase in petrol leads to 6 bps direct and 6 bps indirect rise in inflation and a 5% in diesel leads to 48 bps direct plus indirect rise in inflation, he added.

Indranil is of the view that rural CPI is 70% so food inflation will have a major impact. On the other hand, he also feels that good rains may result in inflation topping off.

Excerpts from CNBC-TV18's exclusive interview with AB Mazumdar and Indranil Sengupta:

Q: After the rain in Kerala, is it looking like we have had a decent start to this monsoon?

Mazumdar: Monsoons arrived over Kerala around normal time or little ahead of normal time, but the progress at present is very slow and may be there will not be any further progress immediately.

Q: What are the early signs like and what do you expect to see particularly over Western India in the next few days?

Mazumdar: At present there is some problem over Arabian Sea. There is a vortex that has formed and that is causing some disruption in the current monsoon that is why the monsoon current has not been able to establish. The rainfall is occurring little bit here and there because of convective activity pre-monsoon showers. But, monsoon rains are yet to start and are advance of the Northern limit, upto Karwar we have the extension of the monsoon. So, beyond Karwar at present the advance immediately is not possible.

Q: Will this monsoon season be vital particularly with reference to what is happening on the food inflation side?

Sengupta: There is a 5% change in agro price inflation, so the direct  impact on inflation will be about 150-basis points. What this essentially means is that if we get good rains, we will probably see a top off in inflation in August to around 7% levels. That will give the government and Reserve Bank of India (RBI) the flexibility to balance growth and inflation.

On the other hand, if we get a bad monsoon, clearly inflation will go into double digits and make things much worse. Rice is very sensitive this year, because international prices are so combustible. In oil seeds also we had a gap in the winter crop because of very combustible prices and same with pulses. So, it is a very delicate situation in our view.

Q: When you said the advance is happening quite slowly any early signs to be concerned about the quantum or distribution of rainfall or is it too early to tell all that?

Mazumdar: As far as the quantum of rain is concerned, we are monitoring it daily. As we actually count from June 1, the overall rainfall has been more than normal. Our prediction for the entire season is that the rainfall will be near normal. In that way there is not much to worry about and there is no relationship between the advance of monsoon whether it is early or late and this subsequent performance of monsoon. So, there is nothing to be worried about at present.

Q: You did say that the progress was a little slow, are you expecting any significant delays?

Mazumdar: At present it is ahead of time so may be the further progress will be slightly delayed but still there is lot of time available. For example, the onset over Mumbai is June 10 so, still there is lot of time but at present things are not very bright. But, there can be very spectacular development and also the disruption that is there over Arabian Sea will also move northward. Then we may have further progress in after a few days time.

Q: The skeptics of this good monsoon are that low inflation theories contend that a bad monsoon could certainly hurt and spike inflation but a good monsoon may not cool it very substantially. Is that a view that you agree with?

Sengupta: Given a good monsoon you are not going to see inflation come down to 5% levels because these are clearly troubled times. There is flexibility that you get to have a bridge over troubled water, inflation at 7% at the time when oil is so high, at a metal prices are spiked, and an inflation at 11% is quite another. Rural Consumer Price Index (CPI) is 70% food and that covers two-thirds of the Indian population. It's not as if the average Indian consumer is not eating steel everyday, but is clearly eating food everyday. So, this is completely different levels of problem altogether.

Q: Just assuming that fuel price hike comes through and we work with about Rs 3 for petrol and Rs 2 for diesel. Don't you have any calculations on how that would impact inflation and whether there is that fear of a double-digit figure?

Sengupta: Typically a 5% increase in petrol leads to six basis points of inflation direct and another 6-basis points on the second hand side. Increase in diesel by 5% leads to 24 bps direct, 48 bps total. So, the whole thing would have increased about 20 bps direct, and another 20 bps overall. That wouldn't take inflation to double-digits right away unless the rains are bad. But then clearly pressures continue to mount.