Experts worry inflation will form basis for Rajan‘s policy

August Wholesale Price Index (WPI) inflation reached 6.1%, higher than the 5.79% encountered in  the month July. The rapidly rising prices of food articles caused maximum damage to the August WPI inflation basket. 

Sajjid Chinoy, JPMorgan, Agam Gupta, Standard Chartered Bank and Gaurav Kapur, Royal Bank of Scotland gave their reading of the market and expectation from the Reserve Bank of India (RBI) policy meet on September 20. The new RBI chief, in his first speech, had hinted inflation will form the basis for framing the next monetary policy. With inflation coming in at 6.1 percent, experts are concerned whether growth will get importance at all. Below is the verbatim transcript of their interview on CNBC-TV18 Q: How will the market handle inflation, after all it is entirely food led? Will there be some reconciliation that come harvests, we are going to see lowering? Gupta: As you pointed out it (inflation) is food led but we also have to take note  that the Reserve Bank if India (RBI) governor, in his first speech, had said that inflation, no matter from what source, will be looked at closely. He has given indications that he is going to focus on inflation, no matter what source it comes from. It looks like difficult situation - where the headline inflation is going up and the core or the manufacturing is not going up, which is a signal of lower growth. The market will not take it positively. It is another reason to not buy bonds at 8.25-8.30 percent region. So, you can easily go to 8.6 percent but not above that in the run up to the Federal Open Market Committee (FOMC) meet, the monetary policy. Q: Very bad numbers in terms of core inflation, 1.9. I wonder if any manufacturer will even want to put in any manufacturing if the inflation is almost in deflation territory at 1.9 percent, as well overall inflation coming in so much higher? Kapur: We have seen for a while now that there is a consistent loss of pricing power for the manufacturing sector and even the revision which we have seen in the last couple of numbers would largely be on account of food. So, we continue to see food and fuel driving inflation whereas weak demand keeping a tab or keeping core wholesale price index (WPI) inflation lower. Therefore, the point is that from hereon where does the RBI start laying more emphasis on. If the new Governor is to be believed - in his first speech hints were given that consumer price index (CPI) may also be considered with more focus than it has been so far. So, the general trend seems worrying. Q: All bets off in September but do you think there is any room for the governor to help growth? Chinoy: This is a problem that we have spoken for the last three months what is the worrying part of 10-15 percent exchange rate shock, it’s stagflationary. It can simultaneously pull growth down and push inflation up and that is exactly what we are seeing in India. RBI needs to be quite focused on its objective. We cannot think about growth before we think about macro economic stability. We have seen some good news in the trade data and the current account front, I think the focus needs to be firmly on keeping inflation expectation down; managing inflation pressure making sure our fiscal deficit does not slip by much. That has to be the near term objective of policymakers. Let us not confuse objectives. Growth will only pick up few months from now if there is a semblance of macro stability in this economy. Q: Fuel inflation has not seen that much of an uptick on month on month basis. Does it then mean that the WPI figure could get worse because of the impact of fuel price hike or maybe even the rupee depreciation coming into play more aggressively in the coming months? Chinoy: That is possible. I think it was 1.3 percent increase month on month in fuel prices which is not small given that lot of fuel prices in India administered. If you see diesel price hike over the next month or two which is decisive that could push inflation up. I am not sure that is a bad thing, that’s an administered price increase and would do well to sentiment and will help fiscal deficit but that is the risk going forward. It is either diesel price go up at home or oil prices harden further internationally, there could be more pressure on fuel price. Q: Where do yields go from here, 8.53 or thereabouts. How will the market price in this bad news eventually? Gupta: The focus is going to remain on the bigger events - the FOMC and the monetary policy from RBI. The focus will remain on the tone of the monetary policy. I do not think anyone was expecting any sort of easing measures coming in, in this policy. Everyone is going to watch out for the tone. There are enough fears about focus shifting to CPI. So, till the monetary policy we are going to remain in this range around the current levels and it will only move after the policy.