See June CPI at 9.3%, May IIP at 0.5%: BofA ML

The data for June consumer price index (CPI) and May Index of Industrial Production (IIP) will be released today after market hours. Indranil Sengupta, Chief Economist - India, BofA ML expects June CPI to stand at 9.3 percent and May IIP to be at 0.5 percent.

BofA ML sees India's GDP growth at 5.8 percent for the whole year. "Despite the rupee depreciation some banks have cut their lending rates, but if the rupee depreciation continues to delay rate cuts and liquidity easing by the RBI then we will have to wind down growth numbers," he told CNBC-TV18. According to him, CPI should ease in the next few months and WPI inflation should head back to 5.5-6 percent in the second half of the year. Below is the verbatim transcript of his interview to CNBC-TV18 Q: What are you expecting by way of trade deficit number? A: I think the number will be lower by about USD 3-4 billion than last month largely because gold imports have come down. So, effectively what that means is that you are looking at current account deficit, which should be closer to 4 than from 4.8 percent last time. Q: If it does come about USD 17 billion this time then how is the market likely to react to that? A: I think the market already knows this that gold imports are coming off, the current account deficit is likely to be lower than last time. Most of the fundamentals of the economy whether it is commodity prices stabilising, growth bottoming, issues with China that leads to some amount of risk diversification or rains, all these are in favour of the currency. The problem in the currency right now is that, first there is a cross currency issue and second, there is an issue with the Reserve Bank of India’s Fx reserves. Therefore, those are what are leading to the nervousness in the Fx market rather than data on fundamentals. Q: We have seen some bit of respite in the fall of the rupee and stock market and entire quantitative easing tapering story. How does all this place the RBI on July 30, will that be a non-event with Governor not doing anything. A: I do not see the RBI cutting rates right now, though of course as I keep saying that if they do the rupee may strengthen as the support from the foreign institutional investors (FII) equity flows. However, it seems as the RBI will be on hold this time and probably the first cut can be in September if the currency stabilises by then. Q: The expectation for FY14 in terms of rate cut stands at about 75 bps thereabout because it has been delayed do you think the total quantum of rate cuts perhaps might be lowered? A: I would not think so. If the currency stabilises, the fact that growth is probably going to come in around 5 percent in the June quarter, the fact that we are getting good rains. Today is inflation number maybe affected by flood dislocation, but the fact that we are getting good rains, everything argues in favour of rate cut. So, unless there is a rate cut, unless you stimulate growth and attract capital flows, how will rupee also stabilise. So, the heart of the matter is to get interest rates down so that growth revives and there is more investment. _PAGEBREAK_ Q: What are you looking at by way of consumer price index (CPI) number today as well the industrial output number? A: We are expecting CPI at 9.3 percent, pretty much like last time. Due to the floods dislocation we might see spike in onion prices, potato prices. We are looking at Index of Industrial Production (IIP) at 0.5 percent today. Q: You spoke about 5 percent gross domestic product (GDP) growth that you are expecting in the current quarter, after the rupee depreciation and the kind of backlash that it will inevitably have on several parameters. What is your growth number for the full year? Have you scaled it down? A: We have a growth projection of 5.8 percent. So far the good thing is that despite the rupee depreciation some banks have cut their lending rates, but if the rupee depreciation continues to delay rate cuts and liquidity easing by the RBI then growth numbers will have to wind down. Q: What is the trend that you are expecting on the Wholesale Price Index (WPI) as well as CPI for the next few months? A: CPI should be coming down as we have better rains. WPI is probably going to bottom in the next two-three months because we have the diesel price hike, the petrol price hike, we already had coal price hike and now that the rupee has fallen almost 8-10 percent that will also add another 50-100 bps points on WPI inflation. So, WPI inflation should logically go back to somewhere around 5.5-6 percent in the second half of the year. Q: CPI therefore will get an uptick or CPI is not impacted by these factors? A: CPI is not impacted that much by these factor because 50 percent is food and 15 percent is fuel which in any case determined by the government’s fuel price hike policy. So, I think CPI should trend down in the coming months given the way the rains are going. Q: What is the house view on the rupee, at least in the next quarter? A: I think rupee is somewhere close to peak and a lot will depend on whether we see measures from the government and the RBI to shore up Fx reserves. They are also discussing about possibilities of issuing sovereign bonds, doing NRI deposit issuance. So, let’s see how that goes because this is fairly dynamic situation right now. The RBI needs more Fx reserves, need more chunky flows to come in and rebuild that Fx reserves. So, the rupee will respond to what is happening there.