Inflation at 8%; Axis Bk sees 0.5% reverse repo cut in Jan

Inflation for week-ended November 29 is at 8% versus 8.4% (WoW) . Earlier, a CNBC-TV18 poll conducted saw inflation at 7.97%.
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Dec 12, 2008, 01.30 PM | Source: CNBC-TV18

Inflation at 8%; Axis Bk sees 0.5% reverse repo cut in Jan

Inflation for week-ended November 29 is at 8% versus 8.4% (WoW) . Earlier, a CNBC-TV18 poll conducted saw inflation at 7.97%.

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Inflation at 8%; Axis Bk sees 0.5% reverse repo cut in Jan

Inflation for week-ended November 29 is at 8% versus 8.4% (WoW) . Earlier, a CNBC-TV18 poll conducted saw inflation at 7.97%.

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Excerpts from Power Breakfast on CNBC-TV18 Watch the full show »

Inflation for week-ended November 29 is at 8% versus 8.4% (WoW) . Earlier, a CNBC-TV18 poll conducted saw inflation at 7.97%.

 

Saugata Bhattacharya, Economist at Axis Bank sees a further reverse repo rate of 50 bps cut by the Reserve Bank of India in January and feels the central bank would bring it down to to 4.5% by the end of March. “Given current situation, yields will not to go that low from 6.5%.” 

 

Bhattacharya feels the IIP numbers would be fairly low and expects the trend to continue for in November as well  

Here is a verbatim transcript of the exclusive interview with Saugata Bhattacharya on CNBC-TV18. Also watch the accompanying video.

Q: Inflation at 8% is probably as per your expectation, what is the trajectory from hereon to the end of 2008 and to the end of financial year?

 

A: We have been lowering the trajectory in terms of what we have been expecting earlier. I believe it might still be reasonable to look at around 2.5-3% of wholesale price index (WPI) inflation rate by end March. Although there is a high probability that it will fall further - there is fairly steep fall in inflation.

 

Q: What kind of a spin will you give the Reserve Bank of India (RBI) action from hereon? They have given some sweeping rate cuts but we had some pessimistic statements on growth coming from the RBI governor for the first time yesterday. Index of Industrial Production (IIP) numbers coming out tomorrow which many people will expect could be zero or 1% at best and maybe negative if we are even unlucky; what are your own expectations in terms of the IIP numbers and more importantly what do you expect from the RBI?

 

A: The IIP numbers generally will be fairly bad; it might be negative or zero or 1% but very low which will probably continue well into November. The November numbers will also be very bad.

 

I am surprised inflation in India has not fallen more sharply than what we had seen so far. It will fall once the petrol and diesel price cuts are factored in. But globally price levels have fallen and inflation rates are relatively sticky.

 

Q: Where do you expect reverse repo rate to be on March 31?

A: We are expecting another 50 basis point cut, so it would be at 4.5% by March end.

 

Q: What would you therefore estimate the 10 year could go to if the reverse repo rate is going to fall so much?  What can the lowest bond yield be in this cycle of rate cuts, do you think the 10 year which had gone to 4.95 in the last cycle could go to 4% level as well?

 

A: Probably, the effects of inflation, inflation expectations, policy rate signals and so on might be somewhat offset by the increased supply of paper in the 5 to 9 year range and probably thereabouts translating into the 10 year bond yields. We might even see a further smaller market borrowing, so that might exert something of an upward pressure on rates. The 10 year rates might respond form 6.5 but I probably wouldn’t go down that low in this current environment.

 

Having said this growth obviously becomes a far more important indicator for policy authorities now and the focus will be on stimulating growth further especially since the slew of revisions in global growth forecasts, which have implications on our exports being sharply revised downwards.

 

So given all this, I think there is room for further policy rate cuts although I don’t think this will happen immediately. I have a feeling that policy rate cuts will take some time – somewhere around January policy if there is further significant deterioration in the growth environment, if employment rates rise and so on we might see an action sooner.

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