While the inflation seems to be peaking, one will have to wait until September 2014 to see whether there are any real green shoots in the economy, says Indranil Sengupta, chief economist, BofA ML.
Also read: RBI likely to hike repo by 25bps; cost of funds key: UCO Bk“For green shoots to play out you need lower lending rates and it is not really until April that you are going to see lending rates come down. So, we will have to wait till lending rates come down and then it typically takes 3-6 months for the economy to react from thereon,” he highlights.
Sengupta further says he expects the Reserve Bank of India to hike repo rates by 25 basis points (bps) in its December policy, following which the Governor is likely to hold rates.
Below is the edited transcript of the interview to CNBC-TV18.
Q: What is your first reaction to the data yesterday and do you think a rate hike is now certain on 18th?
A: We have always said that the Reserve Bank of India (RBI) will hike rates by 25 bps on December 18. We had an above consensus 10.6 percent CPI forecast. Of course it came slight higher than that, but one has got to see that the higher CPI number was driven by a spike in food prices, vegetable prices and that spike is now reversing. So, it is very likely that this is the peak for CPI inflation. Thirdly, core CPI inflation has been stabilising around 8 percent levels which is not very different from its long-term average. So, all in all, inflation seems to be peaking.
Q: Most of the economists are now of the view that maybe CPI has possibly peaked or is close to peaking and food inflation will possibly just about soften going forward despite the fact that there are no guarantees of this. Do you think that the RBI could even hold in the December 18 policy and hold their fire going into next year to assess more of the CPI data more closely and then maybe use the repo rate as a tool going forward?
A: We would think that they will hike this time and then go for a longer hold to see how monetary policy pans out. So, we would expect a 25 bps rate hike.
Q: Is there a rationale for a hold rating at all in December?
A: There is always the other argument that it is largely food prices, but we would still expect RBI to hike.
Q: What about the Index of Industrial Production (IIP) data? After last quarter it looks like some green shoots were returning in the economy. How would you look at that particular data? Do you think the fact that a lot of people are saying that the economy may have bottomed out may not play out or would that thesis still hold?
A: We have been saying that the worst is over for the economy, but recovery is difficult till atleast September 2014. For green shoots to play out you need lower lending rates and it is not really until April that you are going to see lending rates come down. So, it is very difficult to see any green shoots this fiscal. So we will have to wait till lending rates come down and then it typically takes 3-6 months for the economy to react from thereon.
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