WPI can climb up to 8-8.5% in Nov-Dec: RBS

Retail inflation has doubled to 10.03% in August, up from 9.86% in the previous month. In an interview to CNBC-TV18, Gaurav Kapur of Royal Bank of Scotland says WPI can climb up to 8% and even 8.5% as in November-December base effect tends to wear off.

He expects the RBI to cut rate in October. "There is perhaps a growing case for about 25 bps cut in the October-December quarter," he adds. Below is the edited transcript of his interview on CNBC-TV18. Q: What are your thoughts with regards to the consumer price index (CPI) data? A: It is slightly lower than what I was expecting. I was expecting a number around 10.2%. In the month of August, you saw food product prices rising fairly sharply. The weightage of food in CPI is much higher than the weightage of food in the WPI. It’s basically wholesale and retail level inflation. So, we know that prices of food products like sugar and food articles like pulses and all went up fairly sharply in the month of August. So, I was expecting the overall number to be in double digits. I was expecting it to be around 10.2%. Yesterday, RBI pointed out that core CPI is going up. Between June and July, core CPI has gone up. I would think that perhaps food have continued even in this month, though the momentum would have been lower considering that the increase marginally would have been on account of higher food prices. Fuel prices also went up sharply in the month of August. Q: What is the sense you are getting from the RBI’s next course in October? Would it be undecided? Does it go into it with open mind that it will look forward to the September inflation or do you think it has no space? A: The space is extremely limited. The space is not more than 50 bps. Inflation numbers, over the next three-four months, both the headline and WPI and to some extent even CPI numbers because food inflation tends to pick up post September, would continue to remain in fairly uncomfortable territory for the RBI. So, they would closely watch how core numbers pan out both on WPI and on CPI. Other than that, they would also look to see with the measures taken by the government now and with QE3, does the rupee stay or gains some ground? To the extent rupee gains some ground, it tends to negate the effect of higher global crude oil prices. That would start to show up in non-administered fuel prices as in the next couple of months and as we saw in the month of August as well. I do not think RBI’s job will be any easier. They pointed out yesterday that despite growth risk increasing the fact that inflationary pressures have been so persistent that they have to continue with keeping a firm handle on inflation. But there is perhaps a growing case for about 25 bps cut in the October-December quarter. Anything other than that, I do not see anything coming from RBI on an aggressive manner. _PAGEBREAK_ Q: You are going with a possible rate cut in October-December quarter. When are you placing it? How much more before the fiscal year is out? A: I would think that possibility of it happening in October is high. If it has to be done, there is no point delaying it. I think RBI, in the April policy, frontloaded with 50 bps cut expecting the government to take the action, which it finally took. But irrespective of that, RBI would going into the second half of the year with the half yearly review of policy, I am sure that the RBI would have to reduce its growth forecast for the whole year. I think it seems quite likely that in terms of giving the fillip to the economy and considering the lag, I would think October is perhaps the right time. But between October and December, there are there are three policies, anything during that time. Beyond that, I think there is not much room, at max, another 25 bps, until and unless you get a very firm handle on inflation. Inflation headline numbers, WPI can climb up to 8% and even 8.5% as we get into November-December base effect tends to wear off. With this fuel price hike, you have seen now, you will see the second round impact as well. Food prices seasonally tend to firm up between October and December. Q: Could you give us a rational explanation on why exactly food inflation would come in at 12% for CPI vis-à-vis 9% for WPI? A: If you see the weighting diagram of CPI and CPI being major of consumer price inflation vis-à-vis WPI, which is a major of producer price level of inflation, any CPI index will have a higher weightage to food. So, in case of CPI, rural CPI has about 56-57% weightage on food. Most of the price movements are captured within the food basket or most of the price movements related to CPI are captured within the food basket. As a result, you see much higher inflation in food in CPI. I think perhaps there is some base effect play as well. This is not a very long time series. So, it is very difficult to work on and comment on base effect. But the CPI numbers tend to generally have a higher weightage on food because there are closer reflections of the consumers’ actual basket of consumption. That’s a technical point. It’s not a discrepancy; it’s basically two different measures of inflation. One is looking at inflation at the level of producer level. That is why you have manufactured products having higher weightage. The other index is looking at inflation at the level of consumer. That’s why you have higher weightage in case of India on food and fuel. Between rural and urban, the housing element in CPI doesn’t have any weightage in case of rural CPI, whereas urban CPI has element of housing as well. So, it’s a design issue, it’s a weightage issue. It ultimately boils down to what you trying to measure. In case of WPI, you are trying to measure inflation at the factory gate level, whereas in case of CPI, you are trying to measure the consumer level.