Investor mood to be dull; RBI may cut CRR: Kotak Mahindra

Indranil Pan, chief economist, Kotak Mahindra Bank explains to CNBC-TV that he estimates the IIP to be at 5 percent due to a base effect from October 2011 and  expects an upswing in consumption. Pan is however not very optimistic on the investment sentiment on higher interest rates and poor visibility of domestic and overseas demand.

Below is an edited transcript of the analysis on CNBC-TV18 Q: What is your IIP forecast this time around with specific reference to performance by the manufacturing and capital goods sector?
A: It is difficult to estimate the internals in terms of capital goods data but we are definitely expecting some amount of upswing on the consumption side. And mainly to do with the fact that this is supposed to be a month which is one month ahead of Diwali and there needs to be some amount of restocking that happens in any other year.
Apart from that, this is also a month where we are likely to see some base effect of the previous year because previous year's Diwali was one month earlier and therefore the restocking happened one month earlier. So we are looking at something like a 5 percent IIP. But if I really look at what the index data on the manufacturing is with a 5-percent IIP, there is no significant month-on-month upswing. Q: What are you reading from the other data that is coming in? Does it still look like economic activity is quite moderate and subdued without any substantial pickup yet?
A: I think investment sentiment going forward is expected to continue to be weaker. Interest rate dynamics remain higher so that is a negative for investments. The other negative obviously is that the visibility of demand is very poor both domestically as well as globally.
So investments will have to struggle for some more time while there could be a bias towards calling a bottom in terms of the erosion of the consumption. So we have more or less reached a floor on the consumption. I am not really expecting a huge uptick in terms of the IIP data or growth per se because overall the policy front globally as well as in India remains extremely restricted.
So for this year, we are still looking at a 5.6 percent in terms of the gross domestic product (GDP) may be going up to about 6.2 percent in the next fiscal. Q: What do you expect to see with the inflation data- the Consumer Price Index (CPI) data today and the Wholesale Price Index (WPI) data on Friday?
A: We do not have a clear forecast on CPI. Overall, from the dynamics of the food sector, there could be a bit of softening in the CPI. It is unlikely to be of significant comfort from the Reserve Bank of India’s (RBI) policy perspective.
On WPI, our expectation is 7.5 percent. While the food index would be softening a little bit, there could be a negative bias in terms of the manufacturing inflation as well as the core inflation because the month for which the data has been collected, witnessed a 3-3.5 percent depreciation in currency. So that needs to be built into CPI expectations. Q: Based on the IIP and inflation data, how do you think the RBI will move next week?
A: For a considerable period of time, we have been expecting RBI to not be able to move before January. That really coincided or was substantiated by the RBI’s guidance that set Q1 of calendar year 2013 as a possible date for easing of rates.
So we would stick to that basis and one of the most important reasons for that is that our expectation of a peak in inflation in December which would be visible as the data comes out in January and that is likely to provide that elbow room for the RBI to drop its repo rate.
Otherwise, in terms of liquidity, the RBI would continue to signal an easing bias through the liquidity and it has been conducting open market operations (OMOs). We are expecting another round of 25 bps may be on the cash reserve ratio (CRR) also. Q: Have you, as some of your peers, revised growth targets upward?
A: We set our growth target at 5.6 percent and we would like to stick to that. We were never looking at anything less than 5.5 percent because as I said, we were expecting these to be the bottom in terms of the consumption demand while we were always building in the fact that pick-up of investment demand could be more lagged. So we are still holding on to the 5.6-percent target.