July CPI a statistical artifact; see no rate cut: JP Morgan

Sajjid Chinoy, Asia Economics, JP Morgan told CNBC-TV18 that July CPI inflation data may seem to be optically good, but this is a statistical artifact .

"There is 1.5% increase despite the fact that fuel prices coming down in that month suggests both that food prices and core prices have gone up sharply and neither of those is good news," he elaborated.

Inflation as measured by India's benchmark wholesale price index dropped to 6.87% in June, nearly three-year low, helped by slower increases in fuel prices, data on August 14 showed.

He foresees WPI climbing above 7% next month. So, Chinoy doesn’t expect the central bank to cut rate in its upcoming meeting on September 17.

Below is the edited transcript of Chinoy’s interview with CNBC-TV18

Q: July CPI at 9.86%. How exactly would you read it?

A: That’s a very sobering number. It may look good optically, but this is a statistical artifact. In July 2011 there was a very sharp increase in the base in the CPI, because that’s the month in which diesel, LPG, kerosene prices were increased in the index after what the government had done at the end of June.

If you saw no increase in the headline index at all month-on-month you would have got a number closer to about 8.3% or 8.4%. The fact that it’s almost 9.9% suggests almost a 1.5% increase in the index.

We need to be careful here, because the series is not long enough to do a seasonal adjustment, so we cannot say this is 1.5% seasonally adjusted. But the fact that this is a 1.5% increase on the back of a 1.3% increase last month suggests there is very little in terms of consumer retail prices easing up.

You saw in the WPI number that petrol prices actually had clocked lower in the month of July. I presume that same thing has happened in the CPI. So, the fact that you can still have a 1.5% increase despite the fact that fuel prices have actually come down in that particular month suggests both that food prices and core prices have gone up sharply and neither of those is good news.

Q: Pretty much September 17th now remains a no action policy for RBI you would think?

A: I would think so. In our view there was a lot of premature celebration at the WPI number last week. That again is a statistical technical issue. We expect the WPI next month which will be available to the RBI before September 17th to go back up above 7%.

The monsoon has improved which is good news, but there will still be some pressure on food prices. Most of all the fact that we haven’t seen any fiscal action and are unlikely to see any before the September 17th would kind of seal the fate of the 17th meeting. The RBI will be prudent to stay on hold next month.

Q: The June inflation data has been revised. It was earlier 10.02% and now it is 9.93% and that would possibly make June and July a sub-10% figure. Would that make a difference to you? It is a similar case with regards to the revision which we saw in the WPI for April which was stagnant at around 7.55%. Would that give you any sort of comfort, lack of an upward revision etc.?

A: That’s clearly good news. The fact that these indices are stabilizing is good news, because at least to have a sense of what the number is when it’s released.

But it makes things even worse, because if the previous month was in a way revised downward then the month-on-month increase is even larger given the number we have right now. So, it is good news at one level, but in a way it suggests that the momentum has increased even more than we had initially thought.

Q: What are you expecting by way of a GDP growth on August 31st? Will some scary sub-5% number scare the RBI into perhaps becoming pro-growth?

A: You can’t rule out a sub-5% number, but it’s unlikely. We would still get a number which is around 5.3% or 5.4%. The central bank has been quite clear that in their reaction function there is some sort of tailor rule which is you look at where growth is compared to potential and you look at where inflation is compared to what your target is.

What we have seen over the last nine months is clearly growth is below what the RBI considers to be potential and that would be cause for easing. But the fact that inflation continues to be so much above what they like to see and their target has forced their hand.

For me the reason these CPI numbers are important is when you have core CPI running at 8-9-10% for the last six months it tells me that India’s potential rate of growth is much lower than we commonly presume.

If our potential was 7.5-8% we could not possibly have seen core inflation close to double digits for six months and RBI would recognize that. In a sense a lower potential then means that your negative output gap is smaller and the RBI’s propensity to ease is less.