Dec rate cut clarion call seen; FY15 GDP at 5.1%: JP Morgan

He says the H2FY15 is going to be even tougher adding that one must brace for CPI below 6 percent in December.

“Hence the pressure for rate cuts is likely to peak in December,” he further adds.

Below is the verbatim transcript of Sajjid Chinoy's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: What is worrying you most about the index of industrial production (IIP) numbers?

A: What is worrying is that the IIP numbers in the previous months earlier in the year are strongly correlated with the exports. We failed to recognize that much of the acceleration in the first six months came because exports growth was strong. In the last two months we have seen export growth kind of moderate and if I look around the world, outside of the US, there seems to be growth cut backs around the world whether it is China, whether it is the euro area, whether it is Japan. So the main support for industrial growth in India has been external demand and external demand were not to fire on the second half. That in conjunction with very weak or no evidence of any capex cycle in there will serve as a significant drag on IIP growth for the next six months.

Sonia: Apart from a moderation in exports which was a big disappointment, many have also complained about the slowdown in rural demand. So domestic demand slowdown, would that worry you as well?

A: I think what we have to realise and one of the reasons we have cut our gross domestic product (GDP) forecast is in the second half of the year there will be two meaningful drags. One is the fiscal deficit, people don’t realise that much of the 5.7 percent number from the previous quarter was driven by unsustainably high government spending, 9 percent in real terms. That is going to slow very meaningfully. The second drag as you have alluded to was rural demand. The fact is that we have had a deficient monsoon which is going drag down consumer non-durables and we saw some evidence of that in August, which on a month-on-month basis declined much more sharply. You should ignore the base effects because consumer durable for all the criticism it has got actually had two good months sequentially. They grew in July, they grew again in August. So the one sector that is showing some promise in our view is still consumer durable. For me, it is consumer non-durables reflecting slackness in the rural demand will be a key drag going forward.

Latha: Are you expecting any good news on the CPI that will come later today? For that matter, what is the forecast going forward? I am going to see that Rajan 6 percent more easily achieved?

A: The upside risks have fallen quite a lot because of two drivers, one of course its commodity prices and you are seeing that in the input price in the season, the PMI over the last couple of months - so to that extent that oil is at USD 90 per barrel that gives the RBI some breathing space. The combination of a weaker growth pick up and commodity prices certainly reduces the upside risks to 6 percent. But in our view it doesn’t eliminate those upside risks but I think in the next couple of months brace for some good numbers for what is worth of our forecast this evening for September CPI will be well below 6.6 percent when the base effect peaks in November, you are going to see CPI below 6 in our view and that in combination with the fact that growth in that quarter will be sub-5 which prints at the end of the month means the pressure for rate cuts in December when you have got a low CPI low growth is going to peak.

Latha: You were already at 5.3 percent for the full year and you have brought it down to 5.1 percent, you expect that the street is going to be littered with downgrades now?

A: The first half of the year we were at 5.1. Now to get anywhere close to 5.5 percent for the full year, you have to necessarily assume 6 percent growth in the second half. Very hard to see with fiscal tightening and the deficient monsoon, how one can be tracking 6 percent. If anything mining and electricity have significantly propped up the IIP. If you take those out, organic manufacturing growth this year has been half a percent.