In-line May inflation won't mar rate-cut hopes: Experts

The wholesale price index (WPI) inflation for the month of May stands more or less in-line with street expectations at 7.55%, where as core inflation number has come in at 4.99%. Whether the May inflation number puts forward a case for CRR cut, a repo cut or a combination of two is debated by a panel of three top notch economists namely HDFC Bank chief economist Abheek Barua, Royal Bank of Scotland's  Senior Economist Gaurav Kapur and Kotak Mahindra Bank (Group Treasury & Global Markets) Mohan Shenoi  on CNBC TV18. The Reserve Bank of India is meeting to review its monetary policy on June 19 when inflation numbers along with IIP and GDP numbers will be taken into consideration.

Below is the edited transcript of the debate on CNBC-TV18. Also watch the accompanying video Q1: Do you think there is a case with 7.55% inflation for the Reserve Bank of India (RBI) to move, what would you expect? Baruah: It is not just contingent on this number, I think the case had built up on the back of the GDP numbers and the IIP numbers and there was a case for going in for some more easing. This certainly doesn’t reverse that case. It doesn’t throw up an extreme number which would act as a rein on a harness on the RBI in easing. So I think the market is somewhat justified in believing that the RBI, to whatever extent it wants to ease, will go ahead. So this is not a shocker, this is not something that will put a spanner in the work or cause the RBI to go back to the drawing board. It is very much in line with consensus; the core number is under control and is likely to be a little lower than last month’s numbers. So it is one of those things that can be comforting in this kind of an uncertain situation. Q2: What would you go with – is this satisfactory enough for the Reserve Bank to move? Would you still go with your 50 to 75 bps CRR cut? Kapur: I would still go with a CRR cut. I was never convinced that the case for repo rate cut immediately was a straight forward case. Considering inflationary pressures, if you see the revision in the data and how things can pan out going forward, there is clearly an upside risk. I think it is perhaps better for the RBI to cut CRR at this stage and take a view in the July policy. The case for monetary easing is there but I think it is the form which is important at this point. Q3: Your view with regards to the core inflation data. It is at round 4.99%, just shy of that 5% mark. How much credence would you give it? Baruah: We have seen this trend of moderating core inflation that the RBI has emphasised. I think the RBI has been trying to convince the markets that its focus is more on core inflation than on headline inflation. So given that context they need to go in for some degree of monetary easing, be it a combination of repo rate cut and CRR cut or one of the two. The core inflation number, can be used to justify or legitimise monetary action. One of the things  to watch out for which hasn’t got the emphasis that it deserves is around some of the international events — I think if there is an adverse development around the Greece elections or the possibility of an exit. However long it might take to actually become concrete, I think it will start sort of getting priced in to international markets. I think then if it stays adverse and if the markets across the world panic, then we have to switch away from this growth and inflation debate into sort of a financial stability mode. In that case I think liquidity infusion will have to be much more than what simply the growth inflation trade off would call for. So then there is a possibility that over the next month or so we will sort of abandon this debate and get into the financial stability mode that we have seen in 2008, we have seen partially in 2009.
Q4: What is your reaction to the number, core inflation is just shy of 5% , how do you think you will behave in the bond markets, is this a time you will sell bonds, what will your reaction be? Shenoi: I agree with other panelists on this show that in India direct instruments of monetary policy are more effective in monetary transmission than the indirect instruments of monetary policy. By direct instrument, I mean CRR. But I don’t expect CRR to be reduced to an extent where the reverse repo rate starts becoming the operative rate. My own expectation is that CRR will be cut but repo rate will still prevail as the operative rate in the market and on that assumption, my own feeling is the WPI numbers that have come out today, they are as per expectations. So I don’t see anything adverse in that but my own feeling is there is significant upside risk to inflation and therefore room for cutting policy rates aggressively from here onwards will be very limited. I still hold my view that anything below 8% for the new ten year is clearly exuberance territory because there is no case for an inverted yield curve at this juncture.