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See rate cut by Dec due to low inflation no: Rel Equities

The inflation number for week-ended November 1 showed a huge fall of nearly 2% at 8.98%. A single-digit number was expected to come in by mid-November, but came in earlier than expected primarily because of a cut in non-administered fuel prices.
Commenting on this lower number, Atsi Sheth, Chief Economist, Reliance Equities, feels the year-end inflation number of about 6% by March 2009 is now quite achievable. She expects RBI to cut the repo, reverse repo rate in the next 1-2 months.
Q: What will be your year-end inflation number for March 31 and more importantly how is the RBI now likely to react given the headroom it might get in terms of rate cuts?
A: The year-end inflation number of about 6% by March 2009 is now quite achievable. We are fairly confident that there were only two risks to that forecast, one was food prices and that we think the seasonal element will come to play by March, so food prices which are still holding steady for now should come off by March 2009. Second is people where worried that the Pay Commission hike, with the farm loan waiver, pre-election spending, there might be second rung impacts on manufactured good prices.
We know enough about consumption and volume declines in sales that it won’t happen either. We are very comfortable with a 6% forecast as of March 2009.
With regards to the Reserve Bank of India or RBI policy - even before this number came out, even before when inflation was on double-digits, even a month ago, we thought growth was the real risk and we still think that is a real risk, which is actually increasing. So, given that one the growth risk is increasing and two the inflation risk is now truly fading quite empathetically, the RBI in the next month or two should be cutting the repo rate, the reverse repo rate as well.
Q: Continuing with growth rate- do you think RBI has been late in that action and going forward lot of economists now expect a negative IIP date in October, do you think that is a real concern?
A: The negative IIP data in October is sort of real possibility. Whether the RBI could have prevented it, I am not too sure. I am one of those people who feel that the slow down started with RBI’s monetary tightening, so it didn’t start with the global financial crisis or because the global economy went into recession. It started, because RBI tightened 2006-2007. Was the 2008 tightening over done? – Perhaps, and that is leading to the real credit crunch that we are now facing.
However, in hindsight it is very easy to say it was overdone, but when oil prices were at USD 147/bbl and people did not know where metal prices were going, one could perhaps be justified in doing what the RBI did which is raising prices. I happen to think, that round of tightening in 2008 is exactly why liquidity is tight right now, credit is tight now, so even if justified that is the proximate reason for October numbers coming out to be very negative.
Q: What would you yearend numbers for GDP (Gross Domestic Product) and IIP (Index of Industrial Production) be for FY09 and more importantly for FY10?
A: The industrial growth for this year i.e. FY09 may come around 5% or so for the year on average. There will be very negative months like October and then you might have an upsurge sometime in early calendar 2009.
I happen to believe that firstly, the RBI has been very agile in term of cutting policy rates. Secondly, our banking system is strong, NPL (Non-Performing Loans) are going to rise over the cycle, but the banking system now has the task of making up for the credit crunch abroad. So all external borrowing, trade credit abroad and even equity markets are closed off the companies now and the banking system has to make up for it. I think both those things in concert will work sometime in the second half of FY10.
So, we see that the recovery will come; it won’t come in the next three-four quarters, but by FY10, credit will be much easier, we think the pricing situation companies will have given up enough pricing power and you will be getting discounts on products, consumer goods and you will see consumption driving up and that’s what drives FY10 recovery scenario. So growth around 7% on an average for both years is actually quite likely, with FY09 being the greater risk to our forecast than FY10.


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