Nov inflation surprises; concern over CPI remains: Experts

India's wholesale price index (WPI) rose to a lower than expected 7.24 percent in November from a year ago period. Although, analysts on an average had anticipated a higher reading around 7.6 percent, the number has certainly surprised a lot of them.

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Indranil Pan of Kotak Mahindra Bank said they were looking at a figure of 7.5 percent and though, on a relative basis it seems to be a better number, when compared to the consumer price index (CPI) it is still not great. Siddhartha Sanyal of Barclays Capital considers the downside surprise to be quite significant because the inflation numbers have been softening over two consecutive months now, making the case stronger. Here is the edited transcript of the interview on CNBC-TV18. Q: Inflation is at 7.24 percent, did you even expect it in your wildest dreams? Pan: We were looking at 7.5 percent. Yes, on a relative basis it is a better number but, if I look at what the consumer price index (CPI) is doing, it is still about 9.9 percent. The two inflation numbers possibly might not be going hand in hand yet in the sense that once we get the next number given the fact that food inflation continues to be on the higher side on the CPI point of view, we can still get a bounce in the Wholesale Price Index (WPI) number next month. Q: What is your take? I am not able to calculate the core inflation immediately but, my guess is it is going to be below 5 percent as well as you are getting an overall on all commodities index number which is clearly losing its momentum. Would you think that the sting in inflation has been controlled and the Reserve Bank would be convinced with this number? Sanyal: Yes there is quite a bit of downside surprise actually and it is quite significant. As you have rightly pointed out earlier, it has been coming for two consecutive months now and this makes the case stronger. The issue here is last month we had one thing left which was the revision part. I am not sure how the was revision this time. So, that is another indicator. Q: The revision is 20 basis points from 7.81 percent to 8.07 percent. Sanyal: That is pretty benign in that case. That is also a decent number. So, as a whole the set of number looks a lot more favourable than what the market and we had been factoring in. So, it is a clear downside surprise that way. Going ahead also it can offer some kind of additional softness to the numbers than what most people had been factoring in that case.
_PAGEBREAK_ Q: Just wanted to get to that point with regards to the discrepancy that you mentioned between the CPI and the WPI data because CPI came in nudging nearly 10 percent for the month of November but, we have WPI which has come in at 7.24 percent, possibly the best figure that we have seen in this year itself. Give us an explanation on what the big factor or the big difference would be between the WPI and the CPI and which one do you think the Reserve bank of India (RBI) is going to take more into cognizance? Pan: I think the RBI clearly has been indicating that with the new CPI in place, they would gradually also be looking very seriously at the retail inflation. The other big factor that the RBI had been pointing out is given the type of retail inflation or the basket of consumption, it is very difficult to ignore the food inflation and the fuel inflation and just look at the core in assessing the monetary policy.
 
Now, if food inflation continues to be on the higher side and that forms almost about 48 to 49 percent within the CPI, I would hesitate to say that in the very near term inflation expectations would be weakening significantly. That itself could be a deterrent in terms of the RBI, in terms of its monetary policy decision.
 
The other key factor could actually be the difference between the way the currency overall hits the WPI or the CPI. The hit on the WPI would actually be relatively higher than on the CPI and during the month in which the data has come out, we had been noting a bit of positive movement in the currency. That could be another factor why the WPI had been going down and that’s why the manufactured number had been on the slightly lower side. Q: Would you therefore expect the Reserve Bank to give out a no event policy on December 18 or could they be impressed enough to continue with their cash reserve ratio (CRR) cut? Pan: I think the CRR cut is possibly what we would be looking at. We are definitely not looking at an immediate reaction out of these inflation numbers in terms of a repo rate cut by the RBI. There could be a CRR cut because we are in the advance tax season and compared to the Liquidity Adjustment Facility (LAF) at this point in time, it can actually tighten to about Rs 1 to 1.10 lakh crore.
In terms of the inflation number, I would be noting the wedge between the CPI and the WPI and the very fact that the CPI actually has a much larger share in it. Q: What are you expecting from the RBI on December 18? Sanyal: There had been many encouraging pieces of information in this particular print, especially if we see the core inflation number. If it starts softening at that pace, it is also very encouraging. But at the same time, if you see the stance of the Reserve Bank, they try to be very conservative on this particular aspect. They don’t think they have yet gained control over inflation expectation and they seem to be very conservative on that. The central bank will possibly like to delay the rate cut decision as much as they can.
My sense is that we will wait for one more inflation print before they actually move. At the same time, they are pretty proactive at this moment to provide support on the liquidity side and we also do maintain a view of 25 basis point CRR cut in this particular policy. Rate cut is a story of 2013 and we do actually factor in quite a significant rate cut of 100 basis points by the first half of 2013.