Jan inflation may fall below 7%, IIP growth moderate: HSBC

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Though the FY12 GDP outlook is quite bleak, inflation has eased off these months. Experts are hoping for a lower inflation going ahead. Leif Eskesen, Chief Economist for India and ASEAN, HSBC Global Research feels that January inflation is likely to dip below 7%.

However, core inflation may remain above 7% while IIP is likely to grow moderately, Eseken said in an interview to CNBC-TV18. He is expecting January WPI to be at 6.7%.

There are some good news though. According to Eseken, there will be sustained improvement in risk appetite only in the second half of the year.

Below is the edited transcript of Eseken's interview with CNBC-TV18. Also watch the accompanying video.

Q: We have seen a couple of decent PMI numbers. Does that tell you that the December IIP may not be a bad number or are you going with a tepid number much lower than what we saw in November?

A: In China you have the Chinese New Year effect and in India you have the Diwali effect, so we have to remember that the number we had in November for IIP was heavily distorted by the timing of the Diwali in 2011 relative to 2010. That's why the annual growth rate was so high.

We certainly expect a more normal growth rate in December. So we will be looking at growth at around 4%, year-on-year could be slightly lower from that perspective. It is partly because of the Diwali effect that brings about that sort of a slowdown. The PMI numbers that we have seen recently at least post the December and in terms of January suggest that, the weakness in the manufacturing segment was not quite as bad if you will as we originally thought. Nevertheless a moderate growth still all in all.

Q: What do you think will impact the IIP growth the most, because the starkest disappointment was on auto sales and the slippage that we saw through December?

A: You are right on that front too. If you look at the infra index, whether it is utilities or related to mining there could be some components that would somewhat see bit of a pullback. In the capital goods segment also there will be some payback following the jump in November, some weakness on that front. But, we are left with this bias that on the consumer side there would be somewhat more resilience, but a bit of a technical payback from capital goods.

Q: What's your take on the inflation number which is coming out early next week? What kind of a reading are you expecting to see?

A: We are going to dip below 7% in year-on-year terms next week. We are looking at around 6.7% year-on-year. A key reason for that should we say a relatively benign reading at least by recent historical standards is, the high base effect for food inflation. If you recall in January of last year 2010, food inflation rose even further. That's a bit of a base effect there.

Stripping that out and looking at what really matters which is core inflation that I actually expect will remain above 7%. It would demonstrate the persistence on that front and it would also demonstrate that the job is not quite done yet in terms of taming that.