SENSEX NIFTY
May 14, 2012, 03.32 PM IST | Source: CNBC-TV18

Liquidity shortage may push RBI to cut CRR: Credit Suisse

Robert Prior-Wandesforde, head of India & South East Asia economics, Credit Suisse was expecting an inflation reading at 6.6% today. However, the disappointing numbers now only signal more trouble for the market ahead.

Robert Wandesforde, Hd India & South East Asia Eco, Credit Suisse

Rising food costs and manufacturing goods saw April’s wholesale price index (WPI) spike to a faster-than-expected 7.23%. Robert Prior-Wandesforde, head of India & South East Asia economics, Credit Suisse was expecting an inflation reading at 6.6% today.

After a dismal monthly industrial output (IIP) data last week, analysts were hoping that the WPI inflation numbers would fall, signalling to the market that the RBI might consider easing interest rates in June.

However, the disappointing numbers now only signal more trouble for the market ahead.

Wandesforde says monetary policy is still far too tight. “I certainly wouldn’t rule out the possibility of a late evening cash reserve ratio reduction at some point over the next couple of weeks or so,” he adds.

Below is an edited transcript of his interview on CNBC-TV18. Watch the accompanying video for more.

Q: The worries are that food inflation is climbing again and maybe the core inflation number will not be as benign as the inflation or what the WPI number might suggest. Do you have any worries on any of those two fronts?

A: Food is certainly the main upside risk here. It is always of course the wild card. In terms of the year on year rate for the manufacturing ex-food inflation - that will almost certainly pick up just because the base effect is very difficult. So there are some risks there. I still actually think that the headline WPI rate will edge down a little bit to 6.6%. That is because actually the base effect for food is very helpful this time. There was a slightly confusing message I think that comes out of this number. The important thing is that core and headline inflation is trending lower. Despite the weakness of the rupee, I think it will continue to trend lower as well over the coming months.

Q: There have been some whispers in the market though about seeing a sub 6% tick on inflation. How much weight would you attach to that kind of reading?

A: I hope it is. We have got a very aggressive interest rate, core more aggressive than anybody else - another 125 basis points of reductions. I would be delighted if that was the case. I can’t at this stage see where it would come through from. The basis in comparisons certainly for core is very difficult there. What is key here is if we look at rupee denominators, international commodity prices which really are the key drivers particularly for manufacturing inflation.

Despite the weakness in the rupee, they have been dropping dramatically. That does bode well for a further trend decline in inflation. The other point I make in this entire context in terms of thinking about what sort of inflation rate the RBI needs to see before getting comfortable enough to cut further. If my forecast to inflation at 6.6% is correct - that would be exactly inline with a long term average of this series at a time when clearly the repo rate is well above its long-term average and GDP growth is well below its long-term average, it suggests to me - monetary policy is still far too tight.

Q: Some people are taking heart from the action that China announced over the weekend in terms of its easing measures. Would you say there is any similarity in the situation and the Reserve Banks’ hand maybe eased because of the action that their Chinese peers are taking?

A: No, I think any action would be totally independent of what’s happening in China. I don’t think there is any particularly close link their between interest rates decisions. To the extent that China’s reducing rates because it is worried about growth. Obviously it has some implications for the growth outlook for India. I don’t think the Indian authorities will actually be focusing much more on what’s happening within the western world which again isn’t particularly favourable right now.

Some renewed doubts about the US, some renewed big doubts about the future of the euro zone. I would also suggest though CRR reduction certainly remains a possibility not because of what China has done but of course because of this liquidity shortage which has once again pushed up to levels that are well above the RBI’s comfort zone. I certainly wouldn’t rule out the possibility of a late evening cash reserve ratio reduction at some point over the next couple of weeks or so.

Q: How much weight do you think the Reserve Bank sets on the CPI number which is being far less comforting than the WPI numbers in the last few weeks?

A: I think at the moment, they are paying attention to it when it suits their case for what they want to do. We saw the RBI referring to a fairly high level of this new CPI inflation figure in the March meeting which is part of the reason why they didn’t cut rates in March and then in April when they did cut by 50 basis points if my recollection serves me right, certainly in the main press release we saw no reference to the CPI number even though it had picked up.

So I think it’s a fairly peripheral number. It is used perhaps to suit the purpose or otherwise of what the RBI really wants to do and that in turn is more determined by WPI inflation, growth and probably politics in that order.

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