IIP for May surprises at 1.2%, CPI for June flat at 5.77%

Soumya Kanti Ghosh, Chief Economic Advisor from SBI, said that the CPI numbers were in line with expectations. He flags two key worries. The CPI may peak out, he said, adding that from August, they will trend down. At this rate, the 5 percent  inflation rate target set for March 2017 will be a challenging, he said.

He expects an accommodative policy from the RBI in its next policy meet scheduled on August 9.Below is the verbatim transcript of Rupa Rege Nitsure and Soumya Kanti Ghosh's interview to Ekta Batra on CNBC-TV18.Q: What are your first thoughts on the Index of Industrial Production (IIP) number?Nitsure: It is mildly positive but I won’t attach much credence to that because we had seen that the growth is primarily driven by certain categories of consumer durables which are directly dependent on urban demand sentiment. However, broadly, you see capital goods production data has sustained its negativity and has continuously stayed in negative growth zone which clearly reflects continued weakness in private investment sentiment. Month-on-month (MoM) fluctuations are primarily triggered by the statistical base effect.Q: 7.79 percent is where the food inflation data has come in so that compares to around 7.55 percent on MoM basis. What are your thoughts?Nitsure: That is in-line with my expectations because even if vegetable inflation sequentially cooled off because of improved arrivals of consignments, there was a problem with tomato prices and egg prices. 70 percent of people in India above 15 years of age are primarily non-vegetarian. We have always seen that during rainy season because of disruption of supplies these become major contributors to food inflation. So, I think food inflation coming in around 7.9 percent is in-line with expectations and is also driven by seasonal factors.Q: It seems as though vegetables is the key culprit and that was expected. 14 percent plus in terms of an inflation tick there and we are seeing some sort of softening which is come into the likes of miscellaneous. What are your thoughts on both of these?Nitsure: As we had earlier discussed, potatoes, tomatoes and onions, they tend to influence the trajectory of vegetable prices and we had seen very sharp spikes coming in from tomato prices in the month of June. So, this was in-line with expectations. However, going forward, July to September because of the unfavorable base effect we will see some kind of uptick in consumer price index (CPI) inflation print. However, on the whole, you will see monsoon progress has been good, monsoon has been gaining strength and the most sensitive items contributing to inflation like pulses and all for that the sowing also has improved on year-on-year (YoY) basis.So, I feel this combined with not so strong pickup in overall growth and government also not giving allowances as recommended by 7th pay commission, they are only giving the salary hikes, that augurs well for CPI inflation trajectory. So, I think these are some of the months when we see seasonal factors dominate in the CPI trajectory. However, going forward, September onwards we may see softening in CPI print.Q: Your first thoughts on the consumer price index (CPI) as well as maybe Index of Industrial Production (IIP)?Ghosh: I will just come with CPI and then I will go with IIP. The first thing with the CPI is that it is in line with the market expectation even though we are expecting it to be little bit higher but it doesn't matter. Because the good thing is that the core CPI has in fact moved down to 4.55 percent. So, that means that the current episode of CPI inflation is entirely driven the food inflation. So, that is the first thing which I would like to point out.The second thing is that the numbers which we are giving up is correct and 5.77 percent I think that the food inflation is largely in line with the 7.2 food, beverages and tobacco last time and also the fact is that the pulse prices possibly year-on-year must have moved significantly lower. Otherwise you would not have got this number. So, on a net-net basis the increase in vegetable prices were expected. That is why CPI has remained at this level. But the good thing is that the core CPI average which is now at 4.5 percent for an extended period from January 2015 gives the hope that the link between the core CPI and the food CPI has not generalised and that is the best thing of CPI data.Just one thing about the IIP data which I would like to mention I should not read too much into the IIP number even though we were expecting a mildly positive number at 0.5 percent.Q: Your thoughts on maybe the trajectory on food inflation and does this change your expectations in terms of what the Reserve Bank of India (RBI) could do in August, just the stability or at least the flatness that we have seen in CPI?Ghosh: No, that is broadly in line with the expectation, but there are two things which are of concern at this point in time because if I were to look into the CPI trajectory on a going forward basis possibly the CPI may have peaked out. So, maybe in the next one or two months you will see some sort of relief and then possibly from September onwards you will see that the CPI numbers trending down and from August onwards CPI numbers trending down. But my concern is that at these rates the five percent inflation target for January 2017 looks a little bit challenging. So, that means the food passage needs to decline at a significantly accelerated levels from current levels so that target could be achieved. That is the first thing.The second thing is that - and that is again I would like to repeat that for the sake of repeating - is that core CPI at 4.5 percent average for the last 18 months is a matter of great comfort and the onus is now on the food supply management to ensure. Just a data which corroborate which I would like to say if you look from March 2016 till June 2016 the vegetable contribution increase has been around 70 bps of which the maximum contribution has come in from tomato, potato and even in fact chillies. So, the government now needs to go full throttle at ensuring that the supplies of this commodity is not disrupted so that we get on to the inflation trajectory but apart from that I still expect that an accommodative policy from the central bank it is possible in the current scenario given the fact that the core CPI remains in the comfort zone.Q: If you can just talk about a trend for the CPI data because right now we are also dealing with the APMC strike. Vegetable prices have gone through the roof to say the least at this point. Near term we are going to see some sort of pressure on food inflation and then you expect it to possibly ease out with regards to vegetable inflation specifically maybe on account of normal monsoon playing out?Ghosh: You are absolutely correct. In fact on a very lighter vein vegetables are now the sultan of CPI, if you want to term it like that. Coming to the most serious point if you look into the vegetables prices as of now in July the bad thing is that the prices have continued to stay at high levels if you look into Mandi. So, therefore I expect at least the vegetable prices may inch ahead further in the coming days. So, that is the negative part. But the good thing as I pointed out is that and I was just very close to looking into the data, the core CPI items, for example items like education, items like clothing and footwear, the year-on-year (Y-o-Y) inflation has actually declined by 70-80 bps over a period from say, August 2015. So, that is a positive thing. So, going forward expect CPI number which may be unfavourable to the market but at the same time expect the inflationary, disinflationary impetus to continue. So, overall slight challenge for the five percent target for January 2017 but as of now I don't think we should not read too much into the numbers because it is not a generalised CPI number.