CPI at 8% in Jan 2015 seems a safe forecast: Moody's

On a probability of re-rating, Sheth said on the scale of relative matrix vis-a-vis other countries, the balance of risk remains.

According to her, there are three things that are constrained on India’s ratings -- current fiscal position, inflation and weak infrastructure.

Moody’s said that under the current scenario, the market consensus is that the Reserve Bank will have a prolonged hold on rates. Sheth doesn’t expect WPI numbers to influence monetary policy.

Below is the transcript of Atsi Sheth’s interview to CNBC-TV18’s Latha Venkatesh and Sonia ShenoyLatha: What are your thoughts on both index of industrial production (IIP) and consumer price index (CPI) numbers?A: They were not that far off from the trend we have seen so far. On industrial output there was a higher base effect to contend with so we should have expected some deceleration on year-on-year basis. On the CPI, the headline number didn’t move much but core CPI that is non-food, non-fuel inflation certainly seem to be trending lower. So I think from that perspective the expectation that IIP will remain in recovery as the year progresses and that inflation might trend down slightly, I think that expectation was supported by these numbers. 

Sonia: What would your target be for the core CPI number say for the next three-six months as well as for the overall inflation number? Do you expect it to fall much below this 7.8 percent level?A: I think there will be a time again when base effects will come into play. As you know last autumn CPI had creeped up so that might help the headline number. Our sense is that the 8 percent mark for headline CPI by Q1 of next year inflation will come out somewhere around that, may be little bit above or below but 8 percent seems like a very safe forecast to make at this point. We had assumed that that would come with the core, the non-food, non-fuel, dropping a little bit below 7 percent and that seems to be what is happening and we are sticking with that forecast for now. One thing that is helping the CPI inflation forecast is the fact that the monsoon did come back a little bit towards the end of this season and that might bode well for food prices. So we might see that helping the headline number as well, as we move into the first quarter of next year.

Latha: Is India in for a rating upgrade?A: You asked me this question on the flip side about a year ago and our answer remains similar which is that you have to look at the rating on a relative basis so it is not just India’s performance vis-à-vis itself over the last year but vis-à-vis other countries that we rate and that is over 120 of them that we rate.In that sense if you look at where relative matrix in India stand, growth has even when it was slower, was higher than its similarly rated peers that remain the case. Infact we think the gap will widen a little bit. Inflation and fiscal matrix even with the improvement that we are forecasting, they remain weaker than similarly rated peers. So I think the balance of risk hasn’t changed and the rating is really a comment on credit risk, not just on growth or one or the other macro economic indicators. We think the balance of risk remains about where the BAA three level says they are and that is why we maintain a stable outlook. Latha: What would make a rating agency upgrade India?A: I can only speak for Moody’s. There are three things that are constraints on India’s rating at this point. The three things are well-known, one is the fiscal position, the government debt to GDP is higher than peers, the fiscal deficit is much higher than peers. The second is inflation again higher and this constrains competitiveness over the long run so that is why it is a constraint on the rating. Third is India’s infrastructure. This is so much weaker than comparable countries and you saw the global competiveness report that came out a couple of weeks ago. This again reinforces that point. Our sense is that if there is a movement in these three factors and this movement is likely to come together if you address infrastructure constraints, you remove supply side constraints on inflation, you improve growth prospects that helps your fiscal. So we think that there is a chance that all three matrix could improve if policy action and global conditions are both cooperative and if that happens indeed I think India’s outlook would improve because these constraints would be removed, growth potential will go higher, all the constraints would then seem less weak than they are right now.