JPMorgan expects RBI to hold rates on July 31

Sajjid Z Chinoy, Asia Economics at JPMorgan expects tomorrow's CPI reading to remain at elevated levels. "The great overhang here is the fact that we are now into the second week of July and the monsoon is still subpar," Chinoy told CNBC-TV18 in an interview.

Reserve Bank of India Governor Duvvuri Subbarao said late on Monday both wholesale price inflation (WPI) and the consumer price index (CPI) were at levels that would slow growth, continuing his hawkish comments since the central bank surprised markets by leaving rates on hold last month.
The statement comes two weeks ahead of RBI's quarterly monetary policy announcement on July 31.
Chinoy believes RBI will take monsoon and higher crude price into consideration before deciding its monetary policy. "We expect RBI to hold rates on July 31," he said.
Inflation, as measured by the WPI was 7.25% in June much above the comfort level of 5-6%. At the same time, CPI for May was 10.36%. Below is the edited transcript of the interview on CNBC-TV18. Q: What are you expecting after the inflation number? Do you think the RBI moves or stays on pause next time or this time?
A: Clearly there was good news in the sense that the headline number is now in the 7-8% throughout 2012. This is the significant gap down from 9-10% that we saw throughout 2011. But, if you look at the details of yesterday's print, the drivers that brought inflation down were primarily a correction in global commodity prices which have since reversed.
Food inflation is still in double digits, even before the rise of the bad monsoon have clearly begun to price themselves in. If you look at the momentum of core inflation, this was missed I think in the debate yesterday. The month on month seasonally adjusted rise was quite high. I don't think yesterday’s print in itself will be enough for the RBI to pull the trigger.
I suspect tomorrow's retail inflation print will be very elevated because food is a much larger part of that basket. Of course, the great overhang here is the fact that we are now into the second week of July and the monsoon is still sub-par. There is enough uncertainty on all of these fronts, plus there has been no fiscal action so far. The window is quite limited between July 19 and 31.
Given what the RBI did in the last review and given that they clearly drew a line in the sand, I think they will be well advised to stay on hold this time around. Q: On that CPI figure you were talking about, what are your expectations for tomorrow?
A: Given that food inflation has gone up month-on-month, our suspicion is that the CPI is going to remain pretty close to double digit mark because food is almost 50% of that basket.
Also remember, core CPI has been in double digits for the last six months. Whatever moderation you have seen in wholesale prices hasn't transmitted through to CPI and frankly, that is what consumer has consumed. Nobody consumes WPI, that is the inflation number that everyone uses to form inflation expectations. That is what people use to deflate their normal returns.
I think that correctly has become a much more important part of the RBI's calculus and my worry is that we won’t see much moderation tomorrow. Q: Which would the RBI be more concerned about while making up its mind, the way the monsoons moved or the fact that crude has gone back to USD 104 per barrel from USD 89 per barrel?
A: I think both. That was the point I was making. If you look at in local currency terms, commodity prices in India, the Indian crude basket as well as the commodity research index (CRI) for example bottomed in the month of June. Since that time, the Indian crude basket is about 8% higher despite accounting for the slight appreciation of the rupee, commodity prices are about 6% high in the first two weeks of July.
Clearly that is a factor and we cannot ignore the monsoon. Food inflation is about 7-8%. If you remember in 2009, you had a bad monsoon and it sky rocketed to above 20%. We are already living with 11% food inflation. A pulse inflation yesterday was already above 20%.
God forbid, if the sub-par monsoon continues, there could be a very severe impact in certain food groups at least and then because of what has happened in the last couple of years, the transmission to wages is quite direct. Now NREGA wages are indexed to CPI inflation in the rural economy which is a very large component of food. Those wages become the floor to rural wages.
I think if you do have a bad monsoon, it is not just limited to food prices going up, there is a pretty direct pass through now to wage prices going up as well. Q: Have you seen enough to bring down your agri growth expectations for this quarter or will you wait a bit on that?
A: I think we will wait a bit. There is still sometime for lost ground to be recovered. I think the next two-three weeks become very crucial. We have seen in the past that you have had a bad June but you have made up a lot of ground in the second half of July and August.
That really is crunch time and that's where a lot of the focus will have to be. I think that's why the RBI is understandably cautious if you are on the verge of a sub-par monsoon. On the verge of inflationary expectations rising, the last thing the central bank wants to do at that point is to facilitate that process even further by cutting rates.