25 bps cut most likely; ignoring CPI big policy miss: CLSA

In line with consensus, Rajeev Malik, Senior Economist, CLSA also expects the Reserve bank of India (RBI) to oblige the market with a 25 basis points repo rate cut today.

“The macro economic survey document does not necessarily always translate into similar sounding action from the Central Bank. Secondly, there is a fair amount of expectation management taking here and part of it is you try and rein in market expectations which to a large extent are following WPI inflation as well,” he said in interview to CNBC-TV18. According to Malik, the central bank’s focus should be on consumer price index (CPI) inflation. India has sixth highest CPI inflation in world and ignoring this fact is a serious misguided focus by the RBI. Also read: Hawkish RBI may keep rates unchanged says Morgan Stanley Below is the verbatim transcript of his interview on CNBC-TV18 Q: Expectations have been swinging wildly ever since the wholesale price index (WPI) inflation came in but you have been sticking steadfastly to that 25 basis points (bps) expectation, you think that is still the highest probability outcome? A: I certainly think so. Yesterday’s policy document should be thought of with three particular issues. One, it does not necessarily always translate into similar sounding action from the Central Bank. The governor’s policy statement is his prerogative and you just have to go back to April of last year to see the difference. Secondly, there is a fair amount of expectation management taking here and part of it is you try and rein in market expectations which to a large extent are following WPI inflation as well. Final point is Reserve Bank of India’s (RBI) increased focus on consumer price index (CPI) inflation. I find it absolutely preposterous that in a ranking of 100 odd countries, India has the sixth highest CPI inflation and nobody cares about it, including the Central Bank as much as it should. Then we turn around and worry about why the deposit mobilisation is so weak. So, at the end of the day, while RBI looks at all different indicators that neglect of consumer inflation, retail inflation is a serious policy misguided focus. Q: That is a very important point because the people whose expectations the RBI is trying to manage probably care only about the consumer price inflation yet the RBI has always desisted from laying that out as the core constituency or the core parameter that it is working with, do you think this policy announcement might make a change to that in the RBI using the CPI to explain why it cannot be more aggressive on rate cuts? A: It certainly will be one of the parameters. Yesterday’s document to some extent alluded to that. Just talking about it is not going to be all that helpful. What would make a meaningful difference especially when you are trying to manage inflation expectations, of people other than those who are in the financial market and care about WPI, is outright explicit forecast of consumer price inflation. It puzzles me that there are other countries more incompetent than us but they can come up with consumer price inflation forecast. So, why cannot we? Q: Yesterday, we have the State Bank of India (SBI) Chairman, Pratip Chaudhuri, telling us that he does not care about a repo rate cut whether it comes or not. He will only translate rates into lending rates if they get a cash reserve ratio (CRR) cut. How strong is the case for a CRR cut today? A: If the underlying liquidity tightness in the system was largely because of core liquidity related issues and not because of government’s high cash balances, the case for a CRR cut would have been much stronger. However, the fact that we have just started a new fiscal year and government spending is going to pick up, I think at the margin case for a CRR cut is much weaker. Public sector banks can talk their own book; it is their prerogative to do that. It is a fair point that actual transmission is weak but the solution of that is not continued reduction as far as a CRR is concerned. One must not forget that we have seen 200 bps reduction in CRR, so it is not as if nothing is being done there. The underlying issue is in terms of how the fiscal is constraining the monetary policy.