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Apr 15, 2013, 12.00 PM IST | Source: CNBC-TV18

See inflation sub 6% by July, Aug; rate cut likely: HDFC Bk

Abheek Baruah, chief economist, HDFC Bank expects March wholesale price index (WPI) inflation to be better than February.

Abheek Baruah, chief economist, HDFC Bank expects March wholesale price index (WPI) inflation to be better than February.

"We are entering a phase of consolidation and perhaps the April number would be even better than the March number. There could be some volatility within a range and the range could be between 6-6.5 percent for a bit," he said in an interview to CNBC-TV18.

Also Read: March WPI inflation seen at 6.4-6.6%

Going ahead, inflation is likely to ease to below 6 percent between July and September. Given this declining trend in inflation, one can expect the Reserve Bank of India (RBI) to cut rates on May 3 and also in the second half of 2013, he added.

Below is the verbatim transcript of Abheek Baruah’s interview on CNBC-TV18

Q: What do you expect to see on the inflation figure today?

A: We are looking at a 6.3 percent number which is broadly in line with market expectations. It comes off from the February level partly because of a base effect and the base effect plays out essentially in the case of primary articles. Despite a sequential increase in food prices that we are building in, there is a very strong negative base effect that pulls food inflation down. This is why, put everything together we are getting a decline in inflation to 6.3 percent in March.

Q: Is there more clarity about the fact that inflation is now on a firmly downward trajectory? Do you expect it to be a bit volatile as the figure we see this month may not necessarily be reflected in the month after?

A: We are entering a phase of consolidation and perhaps the April number would be even better than the March number. There could be some volatility within a range and the range could be between 6-6.5 percent for a bit.

Going forward, we are getting around the period between July and September, the number is a little below 6 percent. So, there is volatility but is within a range. The range itself shows signs of coming down. There is a reason to be hopeful about the prospects for at least wholesale price inflation and that should influence the RBIs decisions going forward.

Q: How will 6.3 percent sit on the RBIs shoulders and what would you expect them to do at their next policy meet?

A: There are a lot of factors that the RBI seems to be talking about as possible deterrents to monetary easing and rate action. However, these factors are likely to persist for a while and therefore, every time there is a strong case against cutting rates like the large current account deficit (CAD), high consumer price inflation, there is reason to be deeply concerned about growth. So, RBI will have to find opportunities to send some positive signals to the market.

The kind of wholesale price index (WPI) inflation numbers that we are likely to see, particularly the core inflation number that underpins it and which is a proxy for pricing power in the corporate sector, it does keeps the RBIs window of opportunity for cutting rates further. I would bet on a rate cut in May and perhaps one more in the second half and then it would depend on the data flow, whether things like diesel price increases feed into second round inflationary pressures. Despite various concerns on the macro front that the RBI keeps articulating, there is a window of opportunity for a couple of more rate cuts.

Q: It is unpredictable but what did you read of the index of industrial production (IIP) figure that we tracked on Friday as also the capital goods figure within that?

A: I tend to take the capital goods figures with a pinch of salt. One has to see what drove it up so sharply in one month. I suspect there is a problem of data accuracy that is typical of the capital goods index. The 0.6 percent number was a little better than market expectations but it is nothing spectacular.

If you look at the last three months data print which has semantically beaten market expectations, it suggest that we are entering a phase of consolidation at a very low level and things might not get worse from these levels. Perhaps, it would set the base for a muted recovery going forward. There are a lot of caveats that need to be issued. We are not getting this consolidation in the same sectors, it was consumer non-durables and capital goods in one month. So, it is still very iffy but one can argue that things are not going to get worse and we might see better industrial production number for the FY14. Some of the better numbers could start showing up in the first half itself.

Q: In the near term, what kind of implications do these pieces of data have on the bond market and the yield? Where do you think it will range between?

A: If we look at the benchmark yield, there are various technical factors that are playing out the possibility of a new benchmark being introduced. But 7.80 to 8 percent is roughly the range that we are looking at given the kind of data flow that comes in. There are lots of things that need to be resolved like the kind of open market operations (OMO) that the RBI does, the auctions beginning. However, the range will be between 7.80 and 8 percent.

READ MORE ON  inflation, WPI, RBI, HDFC Bank

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