May inflation at 10.16%: Will RBI act before July policy?

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS May wholesale inflation at 10.16% YoY Balancing growth, inflation a tough act: Planning Comm See inflation easing to 6% by year-end: Montek

India's wholesale price index (WPI) rose an annual 10.16% in May, faster than analysts' expectations, driven by higher food and fuel prices, government data showed on Monday.

In an exclusive interview with CNBC-TV18, Gaurav Kapur, Royal Bank of Scotland, speaks about the inflation numbers and gives his outlook going forward.

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

Q: What are your first thoughts, do you expect the Reserve Bank of India (RBI) to now act in July, before July, what do you expect?

A: I think if you look at these numbers in conjunction with IIP (Index of Industrial Production) numbers, which too have been strong, I think perhaps there is a case for not waiting till the July policy to act. I know there is liquidity tightness and rates already have on the short-end are close to 5.25 mark. So I still feel that there is room for some measured action by the RBI even before the policy. With CRR (cash reserve ratio) now being ruled out, I think it is perhaps 25 bps rate hike before the policy itself.

I think there is a case for or there is a possibility of hiking because it clearly appears that the demand side condition or the demand side pressures on inflation are winning tractions. This is despite fairly high base effect in this month and going forward the base effect in the next month also is not as strong. So the numbers are likely to hold above 9-9.5% for a while now.

Q: The March inflation has been revised upward to 11%, just about two months back we were talking about whether we have hit the peak in terms of inflation, where do you see the inflation number finally settling there?

A: I think we do seem to have hit the peak for sure. If you factor in high base effect and I think on that side numbers will remain above 8-8.5% for the next couple of months at least next three-four months before it comes down. I am not expecting the number to come down below 7% before the end of the calendar year and towards January.

A lot depends on how the monsoon rains are and how primary article prices react. What one now sees is manufacturing side inflation, especially the core inflation gaining traction, which is a worrying sign. I expect inflation to continue to surprise on the upside for next couple of months at least.