Economist's RBI call: A 25 bps cut in April; data-based thereon

"The El Nino is still prevalent. Overall reservoir levels are low at 20-25 percent. There is no clarity on how much of the Seventh Pay Commission's recommendations on pay hikes will be passed through," he said. "Unless supply side issues are resolved, hope [for a structural slowdown in inflation] are low."

Below is the verbatim transcript of Indranil Pan’s interview with Ekta Batra on CNBC-TV18.Q: First wanted to get your thoughts on the core sector data which was much better than expectations with the likes of even electricity coming in at a nine month high, steel only contracting 0.5 percent – what does that mean? A: As we have basically seen with this type of a data and especially as it corroborates with overall the Index of Industrial Production (IIP), we have seen this data widely fluctuating between a positive territory and a very low positive also at certain points in time. So, it is very difficult to sort of take a clear direction in terms of this data and going ahead and sort of talking about immediately of a significant dose of economic recovery. So, that is the first sense that I would have on this data. Overall, on-ground reality doesn’t seem to have changed much in terms of the growth perspectives. We are hoping that the rural sector does better this year based on monsoons but that is also an if and but at this point in time before we actually get the clear direction from the IMD in terms of the monsoon forecast. We are expecting the urban segment to do better due to the upshot in terms of the income from the pay commission.However, overall, immediately, I don’t think there is any significant call for a significant change in the growth projections for FY17 compared to FY16. Anuj: Very close to the policy, what is your key expectation?A: We are expecting 25 basis points. The very critical element at this point in time to understand is that the Reserve Bank of India (RBI) has waited out the whole post Budget period on to the April 5. So, the clear indication for me there is that the RBI possibly also knows that the extent of room that it has from now on given the fact that we still have certain if and buts on the monsoon factor, the Southern Oscillation Index is still sort of showing El Nino trends which is not good. The overall reservoir levels are quite low at about 20-25 percent so that is also not a very healthy sign. Overall we still are not clear about the extent of a pass-through that would be happening from the seventh pay commission in this particular year. So, from the RBI’s perspective, I think it is still not a very clear indication or a direction that a sustainable drop below the 5 percent headline consumer price index (CPI) actually is due. If I really look at the core CPI numbers, it remains quite sticky and unless the supply side actually sort of stands up in a very significant way, the hope for core inflation to come down would actually be quite low. So, our bet is for a 25 basis points on the April 5th. Going forward, it would be significantly data driven and therefore it is very difficult to take on any further incremental call immediately.