Expect another 25 bps CRR cut in Q4: Indranil Pan

Indranil Pan, chief economist at Kotak Mahindra share his views on RBI's credit policy.

Below is the edited transcript of his interview to CNBC-TV18. Q: After the RBI's decision to hold the repo rates, North Block is visibly upset. The finance minister says even if we need to walk alone when it comes to reviving growth, it is a challenge that we will take on alone. Do you think the finance ministry is being unreasonable on asking the RBI to move on rates given the current situation with respect to inflation?
A: From the inflation perspective and the way RBI is looking at the current account and fiscal deficit and highlighting the risk out of the twin deficit problem for India, especially in an atmosphere where the global financial market conditions are not stable and there is a significant risk from that angle to, it is quite justified that the RBI has nor moved on the rates. Q: Government argues that there is too much focus on inflation. The finance ministry officials say that this time there was a clear case to cut rates . Do you think the Reserve Bank was over cautious in not moving on rates today?
A: The food and fuel inflation in India has been on the higher side for a significant period of time at least one and half to quarter to two years. It is definitely not transitory. It has remained sticky doesn't give us a sense that it will come down also anytime soon. So, the clear shift in terms of the Reserve Bank's way of looking at inflation is more towards a retail CPI especially with the new CPI index being there rather than purely the core inflation as was traditionally being looked at.
Secondly, the food within the retail basket is about 49 percent of the CPI in terms of it in India whereas in the rest of the Asia it is close to 20-25 percent. Q: The governor said in his commentary, that there could be scope to cut rates in the fourth quarter if inflation remains in a downward trajectory. It's expected to peak perhaps in December. If the RBI does decide to act then, how much of a rate are you expecting?
A: We concur with the view that any rate cut action may happen in the fourth quarter given the fact that we were also looking at inflation peaking around 8.5% by December beyond on which there would be a base level which would bring inflation down in a significant way and therefore only after December when there is a clear trend indication of inflation having moved lower can the RBI move otherwise they will not be comfortable at all with any sort of rate changes. Q: In the context of what the Reserve Bank has said today and the finance minister's fiscal consolidation roadmap unveiled 24 hours ago, is there any change in your fiscal deficit forecast? The finance minister believes they will be able to do 5.3 percent. Also, what about your growth and inflation, any changes that you are making to your forecast?
A: As of now we are quite comfortable with the 5.6 percent number. In terms of the fiscal, we are slightly away from the 5.3 percent that is the guidance from the finance ministry. We are more closer to a 5.8-5.9 percent number because we see significant challenges continuing out of the oil subsidy bill and let's note that while oil prices globally has not come down the depreciation of the currency is once again in order.
In terms of the rate action, we are still building in a 50 bps of repo rate in the Q4 only and maybe another 25 bps on the CRR possibly again more towards the Q4 of the financial year.