Inflation down to 12.40%: Experts see no respite yet

The inflation for week ended August 16 is at 12.40% versus 12.63%. Earlier, a CNBC-TV18 poll had seen inflation for the week ended August 16 at 12.77%. Inflation for week ended June 21 has been revised to 11.91% versus 11.63% earlier.

Gaurav Kapur , Senior Economist at  ABN Amro Bank still does not believe the worst is behind us. He sees the number moving higher in the coming weeks. "There is a statistical high base effect of about 65 basis points, which will dampen the headline number further." He feels the impact of crude prices beyond this should be marginal as the prices have stabilised and have not gone down further.

Kapur said that some of the non-regulated categories could still come off lower in the coming weeks. "Aviation Turbine Fuel (ATF) prices might come down a little more but their weightage is very small in the Wholesale Price Index (WPI) and within the fuels. It is the regulated prices of petrol, diesel and LPG, which have higher weightage, and which matter little more to the overall inflation scenario."

Kapur cautioned that if inflation is entirely on the basis of the fuel prices coming down, then one needs to be a little circumspect and wait and see what are the other categories doing. He added that foodgrains and some of the food articles like sugar have seen a fair amount of inflationary pressures.

He is still cautious about inflation and sees numbers inching higher but not for the next three weeks, as there is base effect. He believes inflation will peak at around 13-13.5% with a risk on the upside, and sees a CRR hike followed by a repo rate hike by the end of October or early November.

Hitendra Dave , Head-Global Markets at HSBC India feels the Reserve Bank of India (RBI) would be on a data watch mode. He believes this decline in inflation number is largely on account crude prices falling during early August. He finds it premature to say whether or not the RBI would hike interest rates but he sees a fair amount of relief in the market. He added that the market is technically positioned in such a manner that one can see the rally sustain for a little longer.

What will the RBI do?

Kapur is still cautious about inflation and sees numbers inching higher but not for the next three weeks, as there is base effect. He believes inflation will peak at around 13-13.5% with a risk on the upside, and sees a CRR hike followed by a repo rate hike by the end of October or early November.

Dave said that one inflation index reading coming off is not going to make the monetary policy authorities become less hawkish in their stance. "Inflation is clearly in the uncomfortable zone and we see further tightening. It's too early for the RBI to take their eye off the inflation battle so far." He sees at least another round of CRR and repo rate hikes. He said that if the GDP numbers comes in at 8-8.5% the RBI may tighten the monetary policy further as it would then be sure that the rate hike are not slowing down the economic growth.

How will bond markets react?

Dave said, "There is this talk of large buyers buying out Government of India bonds. There is also talk of a number of banks running very close to their SLR limit." He said that the 10-year yield has come off quite a bit and said there is a natural demand for the bonds. He expects it to open at 30-40 paise higher tomorrow.

Inflation internals snapshot:

• Primary articles are unchanged.
• Home prices are up 3% .
• Spices are up 2% and tea is up1%.
• Fuel, power, lubricants are down 1.1%.
• Textiles is up 0.3% and cotton yarn is up 6%.
• Raw silk, copra are down 1% each.
• Raw rubber are up 2% and minerals are down 0.3%.
• Caustic soda is up 2% and fireclay is down 22%.
• Fruits and vegetables are down 0.2% .
• Other food articles are up 0.8% .
• Oilseeds are down 0.2% and mineral oil is down 1.8% .
• Machinery and machine tools are up 0.2% and manufactured products are up 0.1%.
• Basic metals and alloys are up 0.1%.
• Iron and steel is up 0.2% and pipes, wires and joints are down 0.1%.
• Paper and paper products are up 0.1%.
• Chemicals and chemical products are up marginally.