See inflation at 7.8%; expect 50bps rate cut: Credit Suisse

August Industrial production or IIP numbers are expected today and Robert Prior-Wandesforde of Credit Suisse believes there can be a downside surprise. They are expecting a negative year-on-year print due to the fall in auto production numbers and also other factors that are capping industrial growth, he added.

As far as inflation is concerned, Wandesforde expects it to be at 7.8 percent.  He is also hopeful of seeing the RBI cut rates by 50 bps on the back of government reforms.

Here is the edited transcript of the interview on CNBC-TV18.

Q: What are your expectations from the IIP number today?

A: We think there is going to be a downside surprise to the IIP number. We are actually looking for a negative year-on-year print. But it is largely technical. I think that's the first important point to make.

The strike of Maruti has clearly led to a big hit on auto production. Overall auto production fell 10 percent month-on-month in August. That will presumably depress the figures. On top of that of course there are the ongoing factors that are capping industrial growth including the weakness of external and domestic activity.

Q: What do you expect the next inflation number to be which might be quite critical for the RBI's decision on October 30?

A: We are looking for 7.8 percent, so not too distant from the consensus on that one at least if we are right about a modest pick up. But obviously all of that pick up reflecting the increase in the diesel prices which we estimate would add something like 0.6-0.7 percentage points to the year-on-year rates.

If we strip that and I think in many ways it would be appropriate to do so. I think that's what the RBI will be doing and then implicitly we are actually looking for a drop in the WPI ex-fuel rate. I am not sure how vital it will be for the RBI. I think they will cut, quite possibly by 50 bps, not because they think the inflation is under control, but just as a pat on the back for the government given what the government has done in terms of these reforms.

I think that’s almost in a sense part of the bargain here between the government and the RBI that has been lacking over the recent months as you have had this standoff between the two parties. But, with the government having moved now I think the RBI can also move.

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Q: The general hope has been that maybe economic activity has bottomed out and the next GDP reading will endorse the fact that we are slowly on an upward incline, but your IIP expectation flies in the face of that. Do you think it is premature to conclude that economic activity has started picking up again?

A: I am in the camp which believes GDP growth bottoms in the March quarter and it will pick up gradually over the coming months. There are a couple of points to make. If indeed industrial production is impacted badly by this strike, one would expect it to bounce back quite strongly in the September number. It should be hopefully reversed at that point.

Also in practice, the relationship between industrial production growth and overall GDP growth in India is hardly perfect by any means. We can get a divergence there. Since we have been getting a divergence, obviously industrial production has been a lot weaker than overall GDP growth and on occasion moving in the opposite direction.

I think GDP growth will pick up and the reasons for that are the lagged effects of the previous weakening in the rupee boosting real net exports. Two, the reforms themselves may improve sentiment and investment at the margin at least. Three, with the lagged effects of all these interest rate hikes beginning to diminish, in other words interest rates becoming less of a drag on growth and not necessarily becoming a positive as yet, it is becoming less negative on activity.

Q: What has not gone down well with the street are those recent trade deficit numbers. Were you surprised at how bad those numbers were?

A: Yes, I was surprised and I was very disappointed. A very poor number indeed and I think the risk is that the October figure is even worse. It could hit USD 20 billion at that point. A lot of this is once again oil and the good news there is, if you look at the YOY changes in oil prices, they almost certainly peaked in September and will start to come down if the oil price remains where it is. Exports I think will pick up.

We haven't seen the full beneficial effects on volumes of the weakness in the rupee until recently. I think we will see slightly better global activity as well. Non-oil imports seem to me the big wildcard, difficult to call. If we are right and the domestic economy is starting to pick up in India, then non-oil import growth could also pick up.

It is hard unfortunately to be particularly optimistic about a significant improvement in the trade balance from here. But, what is good news is that India's ability to finance that current account deficit has improved in tandem with these reforms. So it is a bigger deficit, but an easier deficit to finance.