Leif Eskesen, chief economist -India & ASEAN, HSBC Global Research said, food price inflation may have come off due to high base effect and that the Reserve Bank of India (RBI) will take comfort from ease in core inflation.
India's wholesale price index (WPI) rose a slower-than-expected 7.45 percent in October from a year earlier.
In an interview to CNBC-TV18 Leif Eskesen, chief economist -India & ASEAN, HSBC Global Research said, food price inflation may have come off due to high base effect and that the Reserve Bank of India (RBI) will take comfort from ease in core inflation.
However, he sees limited room for the RBI to cut rates at the moment.
"The capacity in the economy is still tight despite the slowdown in growth because the slowdown has been led by the supply side. The loose fiscal policy stance is also still something that limits the scope for monetary policy easing. We are looking at 50 bps in total next year," he elaborated.
Below is the edited transcript of Eskesen’s interview with CNBC-TV18.
Q: What did you make of the inflation figures?
A: Yes, it was a positive surprise. The key reason why there was a decline was that the food inflation eased. Also, encouragingly core inflation eased, if you look at manufacturing and stripping out food and beverages etc. that eased from 5.6 percent to 5.2 percent. So, it is positive developments both in terms of headline and in terms of core inflation, so the RBI will take some comfort in that.
When it comes to the decline in food inflation, a part of that could be related to base effects that are tied up with the shifting timing of the Diwali. Last year in 2011 Diwali was in late October, so some of the seasonal increase in food prices took place during October.
This year Diwali was further into November, so more of that increase in festive demand for food and therefore in food prices would have taken place this year November rather than in October of last year. So, that could have had an impact in terms of lowering inflation print from food inflation side. That is important to factor in.
Historical inflation numbers were revised up again in August, from 7.5 percent roughly to 8 percent. This suggests that the inflation prints in September and October have been most likely north of 8 percent, so it is not exactly anywhere near RBI’s comfort zone. The supply side is been the key driver of the slowdown in growth and that has left capacity relatively tight.
We see underlying inflation pressures relatively firm still. We could also start to see in coming months some of the spill over from the hike in diesel prices filtering through to core inflation pressures. It is one observation, one development in the right direction, but one observation does not make it trend. We need to see more progress in terms of inflation risks coming off and more progress in fiscal consolidation in terms of concrete measures before the RBI will warm up to rate cuts.
ADS BY GOOGLE
video of the day
Economy turning for sure but cant say for mkts: DSP