See 25bps CRR cut from RBI in December: HSBC

November inflation figures positively surprised the street as it went down to a lower than expected 7.24 percent against analysts' expectation of 7.6 percent. Leif Eskesen of HSBC Global Research believes the risk of high inflation still remains and the consumer price index (CPI) number points towards such a trend.

According to Eskesen, at the moment the Reserve Bank of India may consider cutting the cash reserve ratio (CRR) by another 25 basis points. However, he is not very hopeful of any significant headway on the monetary policies from the central bank.
Eskesen further cautions that upside risks to inflation still remain and the RBI must be cognizant of the fact. "RBI needs to see a clear trend of inflation beginning to come off before they can begin to cut policy rates. That's also to some extent related to what happens on other policy fronts. Overall, it is important in India that the macro economic policy setting that is the combined settings in monetary and fiscal policies are quite tight," he explained.
Besides, more concrete steps to deliver fiscal tightening and consolidation may allow the RBI to ease rates ahead, feels Eskesen. Here is the edited transcript of the interview on CNBC-TV18. Q: Inflation figure due out today, how ugly do you think it is going to be?
A: We are looking at a slight uptick in inflation to 7.8 percent year on year. That to some extent will be driven by food inflation picking up. That is partly a Diwali effect kicking in. Diwali last year was in October and this year it was in November. So there will be a base effect on the back of festive buying of food and that would lift the food print as we see it in the November reading.
We also got a little bit of clue from the consumer price index (CPI) number that came out the other day. That was also trending up effectively and some of that was related to food. Again a picture of quite elevated inflation and that is going to be with us for a while still. Q: Next week when the Reserve Bank of India (RBI) speaks, do you expect it to be a no change kind of a policy?
A: Yes we expect a no change in terms of policy rates. We do expect that they could go ahead and cut the cash reserve ratio (CRR) by another 25 basis points. A liquidity deficit is still a little bit above comfort so they want to make sure that equated flow is uninterrupted from that perspective. There could be another cut in the CRR. But, in terms of overall monetary policies, they remain on hold.
_PAGEBREAK_ Q: Do you think by January conditions would have become a little bit more conducive for a rate cut or do you see this kind of turf or inflation trajectory continuing which will limit the RBI’s ability to cut even in January?
A: There are still upside risks to inflation that they have to be cognizant of. So RBI needs to see a clear trend of inflation beginning to come off before they can begin to cut policy rates. That is also to some extent related to what happens on other policy fronts. Overall, it is important in India that the macro economic policy setting that is the combined settings in monetary and fiscal policies are quite tight.
For RBI to be able to begin to cut monetary policy rates and ease monetary policy, you need to see more concrete steps that would deliver fiscal tightening and fiscal consolidation. We haven't really seen that delivered yet, other than the commitment to moving things forward on the fiscal front. But, they would like to see some more assurances if the fiscal is moving in the right direction. They also want to see how the winter session in parliament pans out in terms of implementation of structural reforms.
That is important for the revival of the supply side of the economy and it is also something that has inflationary implications. For now, they have waited out a little bit and there could be a cut in the early parts of next year but, we'll have to see how inflation pans out and we have to see how policy implementation on other fronts pan out as well. Q: Did you have a chance to study some of the policy decisions that came thorough yesterday, both in terms of the land acquisition bill and a cabinet committee on investment, any change that you expect to see either in terms of the investment cycle or the industrial cycle because that's what has been struggling as the IIP numbers have indicated?
A: Yes, effectively the steps we have seen more recently and the steps we most likely will see over the next few months in terms of continuing to see little more traction on the reform side is absolutely crucial for a revival in the investment cycle. Investments have been held back because of the uncertainty about the policy prospects in terms of implementation of these structural policies that are key in terms of having India delivering its medium term potential.
It is 8 percent plus in terms of growth. You need to see continued traction on this front. We do expect that the government will be able to continue to push through reforms. There will probably be some steps taken to address the implementation of infrastructure related projects and other bigger projects, possibly through the National Investment Board (NIB).
That could also help in terms of reviving the investment cycle. Overall, when we look at the outlook for growth, we are looking at a sideways growth in the short-term and then a gradual pick up in growth during the course of the next fiscal year as we get a little bit more of a pick up in the investment cycle which will have to be the portion of the demand side that will lead the recovery.