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Atsi Sheth , Chief Economist, Reliance Capital said that the inflation has not peaked yet. She believes that part of the marginal decline in inflation is due to lower fuel prices. Sheth expects inflation to inch back up to the 13% mark.

 

The Pay Commission hikes may also add to inflationary triggers, Sheth said. She feels that the risks to inflation are largely balanced with bias on the upside. She also feels that interest rates may be close to peaking out. She added that RBI may not raise repo rate in October though she does not rule out a CRR hike.

 

Excerpts from CNBC-TV18's exclusive interview with Atsi Sheth:

 

Q: What did you make of that marginal dip in inflation that we saw yesterday?

 

A: It was marginal and part of the contribution, of course, was from the decline in fuel prices, the unregulated fuel prices, which was expected. So while it was a bit below the consensus, I do not know if it's right to say inflation has peaked.

 

Q: How much of it is because of a slightly more benign base effect?

 

A: The base effect last year was exactly the same.  So the index did not change in the two last years. Although the base effect had a bit of an impact, there was still a week on week increase.  Fuel prices did decline a bit but we do not know where food prices are going to go given the floods in certain parts of the country. We do not have any  idea how volatile oil is going to get going forward or how commodities will behave..

 

Q: Do you think in the next few weeks inflation may start inching up again closer to the 13% mark?

 

A: Our forecast depend on three big factors; (1) where are global commodity prices going and how much of that is reflected in Indian commodity prices? (2) agricultural output based on harvest in the next few months. This is decisive for food prices. and (3) manufactured prices: so far we have seen seeming reticence on the part of most manufacturers, we hear anecdotal evidence here and there of prices being increased but they haven't been increased on a large scale basis.

 

Going forward we are going to see money flow in the system in the form of the Pay Commission hikes. Tthat might encourage certain products to raise their prices and that too would add to inflationary pressures. We do see it inching up towards 13%.   

 

Q: Over the next two-three months, do you see an upside or downside risks to inflation?

 

A: They are actually balanced and a bit more to the upside because we are forecasting that it would go up to 13%. The big downside risk is of course global commodity prices, ; specifically oil. Also other commodities, metals, soft commodities etc.  Edible oil as we know has been one big contributor to inflation here in India and elsewhere. So those are the risks and from what we know there is no dramatic upside risk to those..

 

Q: How will the RBI approach the situation if inflation hovers in this 12% kind of range - give or take 0.5%?

 

A: The RBI will now focus on balancing slowdown in growth and high inflation. On inflation story, the market seems more comfortable now than it was a month ago. But we also know that there are other inflationary pressures in the system. For instance, credit growth is still not significantly below the 25% mark, which is what they want, and money supply growth is still above 20%.

 

So those are the things they would look at but net-net the inflation number itself is not going to be a source of great discomfort unless it rises well above 13% or there are inflationary sources either globally or locally. But the RBI does not see major inflationary sources irrupting in the next few months at least. So in terms of the interest rate outlook we are closer to peak on interest rates.         

 

Q: Do you think they will raise repo rates again in October or not?

 

A: Probably not. But that doesn't rule out a CRR (Cash Reserve Ratio) hike. Liquidity is still not out of the woods in the sense liquidity is still relatively comfortable in the system and there are other things that are going to feed this liquidity. Going forward, the big Pay Commission hikes is going to impact this year with the fiscal deficit rising. So there are pressures coming from the liquidity side.

 

Q: Do you think GDP numbers will top 8% for Q1?

 

A: Yes we do; given the data that we have we know that industrial production output is going to be lower on YoY basis. We have the IIP data for those three months so we are expecting that to be lower. On services sector growth, we have relatively little high- frequency data. But from anecdotal evidence,  by looking at company reports etc, there doesn't seem to be a dramatic slip in service sector output. So services may grow little less this year than last year but hold steady and the overall number will come up above 8%.