Inflation can get nasty, predict experts

It was a seminal week in terms of data. The Wholesale Price Index (WPI) inflation turned positive after remaining in the negative for three months. A statistical joke ended and reality hit. At the current weekly pace of price rise, we may well touch 7% inflation by March.

For three months many marketmen and policy-makers fooled themselves that inflation is in negative terrain, which means we pretended that prices are falling despite growing evidence of severe food inflation and the fact that consumer price index remained over or near double digits for most of 2009. Now the fig leaf of a negative WPI inflation is gone. How ugly can inflation get? Where can interest rates head? Is demand for loans picking up and will the government oblige with a lower deficit at least next year. CNBC-TV18's Vidhi Godhiawala and Gopika Gopakumar polled a slew of economists and bankers to check out where they see inflation.

Here is a verbatim transcript of their comments on CNBC-TV18. Also watch the accompanying video.

Food inflation has been surging since April and now with the whole sale price index also coming into positive territory, the likelihood of high inflation is closer than we thought. 80% of the economists polled by CNBC TV18 said that they expect WPI inflation to be higher than 7% by March 2010. So will that mean RBI starts preparing the country with rate hikes any time soon? Not so.

70% of economists polled expect the first rate hike only in April; the balance 30% see it coming in the January March quarter, no voters for a hike in 2009. However, quite a few economists expect the RBI to increase the cash reserve ratio (CRR) in 2009 itself as the inflation meter starts to tick higher and higher.

20% expect a CRR hike before December; 20% in the January policy; 40% sometime in the January-March quarter; 10% see the CRR hike coming in the April policy and another 10% don't see the RBI using CRR anytime soon.

The rising inflation is expected to have a salutary impact on the government's fiscal behaviour. All economists polled expect fiscal deficit to be lower next year.

50% expect it to be between 6 and 6.8%, and the other half expect it to be between 5 and 6% next year.

On credit offtake there is a very mixed opinion.

Only 20% of the bankers were very pessimistic and put credit growth at 15% or lower by March; 20% thought it would be between 18 to 20% but an overwhelming 60% of the bankers thought credit growth will jump to over 20% by March from the 14% level as of August. However, this optimism is not at all shared by economists.

None of the economists polled see credit growth above 18% for FY10, 70% see it between 15 and 18% and 30% see it even below 15%.

So clearly at the start of financial year 2010, India will have some troubled macro parameters according to economists. Inflation will be high, repo and CRR hikes will be under way, growth would not quite have picked up but a sober government may have cut its fiscal deficit.

So that's the word from the experts-inflation can get nasty.