Oct 17, 2011, 05.45 PM | Source: CNBC-TV18

RBI to be hawkish even post 25 bps rate hike: Credit Suisse

CNBC-TV18 catches up with Robert Prior-Wandesforde, head of India & South East Asia economics, Credit Suisse, to get his perspective on where our economy is headed and what is the likely move from RBI going ahead.

CNBC-TV18 catches up with Robert Prior-Wandesforde, head of India & South East Asia economics, Credit Suisse, to get his perspective on where our economy is headed.

He pegs FY12 GDP growth at 7.2% and says that the central bank will most likely raise rates by 25 bps at the upcoming policy review. Taking a deviant view from street expectations so far, he says, “We expect RBI to continue its hawkish stance even post the rate hike.”

Prior-Wandesforde expects rate cuts only in April-May next year.

Below is the edited transcript of the interview. Also watch the accompanying video

Q: Are we getting another 25 basis points on 25th October or you are not sure yet?

A: I guess we are never quite sure with the RBI but yes, our forecast is another 25 basis points. I think 50 is more likely than 0. There are two key things here, one is the wholesale price inflation data still, in Subbarao’s own words, ‘well above their comfort zone’ and secondly, all these comments coming from Subbarao’s and deputy governor’s and that they remain very hawkish. There is no sign that they are taking the foot off the brake whatsoever really at the moment. As a result, not only do we get 25 bps or 50 bps but we also get a hawkish statement following the meeting.

Q: So how much longer do you think we will have to wait before the rate cycle starts turning down?

A: Well I suspect it’s not going to be for some time. My own forecast is that we get the first cuts early in fiscal Q1, so at April May time. By then, I would certainly expect WPI inflation to be down finally; I would expect WPI inflation to be printing with a number beginning with six. I think we will also have a quarter or two of GDP growth printing with a 6 as well. That combination, assuming the world is still in a bit of mess, I suspect we will then start to see reductions. But clearly, the risk is that we get further hikes and later cuts. That’s certainly advance risk right now.

Q: How many more do you think the RBI will be doing because that will create a big disconnect between what’s happening in the system versus what the Reserve Bank is doing?

A: Well at the moment we have only got one more ourselves, but I think that we may get two maybe three more. That certainly can’t be ruled out at this stage. The way the RBI orrather, Subbarao seems to be looking at, at the moment, is that he is not going to start easing off until there are very clear signs that inflation is coming off. In other words, he is being reactive to WPI inflation rather than proactive. Now in some ways, I can understand that. It reminds me a bit of the Volcker policy in the US in the 1980. It really is almost a deliberate attempt to keep policy too tight for too long to bring inflation expectations down to break that sort of wage price barrel that’s arguably is underway in India. So in some ways, I don’t think they can be blamed too much. Policy is being kept too loose for too long, maybe policy has to be kept too tight for too long now.

Q: Most people seemed to have brushed off last week’s IIP figure given how volatile it’s been, but what is it pointing to in terms of growth target for you?

A: Well at the moment, we are 7.2% for the current fiscal year. As you know we had been below consensus for a very long time now. We are not massively below obviously now. We are having quite a bit below consensus for the following fiscal year and that’s probably what I would emphasize, a bigger gap, if you would like. I think all these interest rates rises that we have seen take a long time to come through; take twelve to eighteen months to come through. So really, the rate increases that we see and the monetary tightening we have seen over the last six- nine months would have much bigger impact on growth in 2012-13 than it will in 2011-12.

If anything, the risks to our numbers are probably on the downside if the RBI continues to tighten policy. But as far as the relevance for the market is concerned, I think probably most of the downgrades have come to this year. However, they all have a lot more downgrades to come to analysts’ earnings expectations for 2012-13 and I suspect that is only just beginning now.

Q: There is one view though that while the base effect will see the headline WPI print coming down, week-on-week inflation will probably not moderate very significantly and will continue to remain persistently high. So you see that happening and how would the Reserve Bank approach that?

A: I think that’s largely right. We will see some softening in the sort of weekly numbers or possibly the monthly numbers. After all, we have seen at least until the last week or so, some fairly large declines in many commodities, not all, but in the level of many commodities particularly in the metal space have come off. And it would be surprising if that wasn’t reflected in some softening in the weekly numbers.

Naturally, looking into the detail of the WPI figures, there a couple of crumbs of comfort, I wouldn’t go beyond that. The fact that the manufacturing food component dropped marginally to 7.6%-7.8%, that’s the lowest since May. Also, what I noticed that the upward revisions are now smaller than they were up to a percentage point; for the past couple of months, down to 0.2 percentage points. So there are a few bits and pieces one can cling onto there. But it’s not particularly present and I don’t think it will be for a few months yet.


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