Inflation trend to flatten, decline in future: ICICI Secs

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

Q: Would you say that the inflation number was singularly happy news and that from hereon you can reasonably expect inflation curve to start flattening and eventually declining?

A: It was good news and some indications were there last week also the way manufacturing index was behaving. In the near-term there is some uncertainty and on the primary article front, a lot of essential commodity prices have gone up because of the flood situation. So maybe there is some possibility of inflation going up in the near-term. But the trend is for the Index to flatten out or even decline going forward.

Q: As the Governor goes into the credit policy on October 24, he could be staring at one-two hiccups in terms of inflation because there is an adverse base effect around mid-October. And the festive season normally sees some primary article prices moving up. If we see some adverse number can you expect some restrictive hawkish policies from the Reserve Bank of India?

A: The RBI would kind of look beyond near-term numbers. If you look at the global situation, the fundamentals are turning bearish for commodities; they have become quite volatile off late. But over the medium-term we expect commodity prices to come off and that will be a good news for domestic inflation outlook.

On the policy front, there are other considerations; inflation is one factor. The RBI will be mindful of the fact that credit growth is accelerated to above 26% YoY and the fiscal situation is gone completely off-kilter. So there are some concerns for RBI despite positive developments on the global front.

Q: Would you expect the RBI to cut Statutory Liquidity Ratio (SLR) in the policy or anytime soon at all? 

A: Looking at the way the SLR holdings of banks have dwindled the excess SLR holdings, our estimate is anywhere in the range of Rs 60,000 to Rs 80,000 crore of excess SLR holdings by banks. It has reached a critical situation where there is a strong case building up for a SLR cut. The only arguments against it is obviously, the merchant bankers they might be mindful of the fact that there are extra borrowings being lined up by the government.

Secondly, maybe they are worried about the credit growth and they might be thinking that cutting SLR might send a wrong signal to banks but I would argue that using something like SLR to manage credit growth is still not the right policy step. So probably what Reserve Bank of India (RBI) should do is cut SLR at this point of time and maybe send some other signal to banks if they are really worried about credit growth.

Q: Given all these expectations how would you predict the level of the 10-year in the last quarter of calendar 2008?

A: The bond yields are headed up, in the near-term it is possible there is a rally because of month-end buying by the banking system. But looking at the kind of borrowings lined up our estimate is governmental borrowing anywhere between Rs 35,000-40,000 crore in addition to what they have budgeted. We think that the Q3 is going to be packed with borrowings; practically we are going to have a auction every other week, so bond yields are headed up. I would put a range of 8.5-8.75% probably before policy and I wouldn't rule out the 10-year (bonds) hitting 9% or so.