Last Updated : Jan 13, 2018 04:38 PM IST | Source: CNBC-TV18

IIP soars, retail inflation up: Top economists decode the figures

In an interview to CNBC-TV18, Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealer and DK Joshi, Chief Economist at CRISIL analysed Index of Industrial Production (IIP) and inflation numbers.

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In an interview to CNBC-TV18, Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealer and DK Joshi, Chief Economist at CRISIL analysed Index of Industrial Production (IIP) and inflation numbers.

Below is the verbatim transcript of the interview:

Q: Inflation coming in at 5.2 percent, the core inflation number coming a little over 5 percent. What would you expect the inflation trajectory to be for January-February-March and what might this do to Reserve Bank of India (RBI) policy?

Upadhyay: This number is broadly in line with where we thought. We were at 5.3; 5.2 percent is not materially different. Core is a little higher, as you mentioned 5.2. So subsequently we think that inflation should be broadly ranged around these levels for this quarter. The last quarter average should somewhere be around 5 percent - that is higher than what RBI has been thinking.

A little interesting thing here would be what RBI forecast for inflation for FY19 because when they meet in February, they will have to release projections for FY19. We think those projections could be revised higher from what they were last time, as per monetary policy report which publishes long-term consumer price index (CPI) forecast, so that is one area we want to watch out more closely, but this number is definitely in line with broader expectations.

Q: At the moment do you think there is a chance of a rate hike at all in 2018 considering that we have also got a strong IIP number?

Upadhyay: I think you cannot rule out that possibility. I think the bar for changing the stance is a little higher but you could still get a hike with a neutral stance. Technically that would be feasible with a real policy rate argument because as inflation goes up real policy rates will come down. So to maintain the neutral stance you can hike rates, so that is a possibility; we do not want to rule that out but for now we do not have strong visibility. The reason being that the clearer gauges of underlying inflation once you strip out vegetables, once you strip out housing which has been impacted by technical factors, those gauges of underlying inflation are still tracking in 4.5-5 percent range. We do not think those inflation ranges are alarming - that is especially in the context of weak growth. Yes, the IIP growth has been strong but we do not expect a sharp growth pick up into FY19 for a variety of factors. So we are more comfortable with a prolong pause view but with a risk of a hike later this calendar year.

Q: The industrial output number coming in at 8.4 percent for November, a 25-month high read along with good truck sales in the month of December - that is an economy facing sector and a strong Purchasing Managers’ Index (PMI) number. Are we on track to see a fairly sharp second half gross domestic product (GDP) number?

Joshi: Yes and I think even in the Central Statistical Organisation's (CSO) estimate of 6.5 percent, the second half is expected to do much well and as you rightly pointed out, all other indicators are also pointing towards an upturn. So clearly the second half IIP is going to be much better than the first half and overall this creates somewhat an upside to 6.5 percent growth that CSO has forecast because their projections are on the basis of seven months of this year. If the second half does well, it will also get reflected in overall growth performance.

Q: What would you expect bond yields to look like up until the Budget?

Upadhyay: We think it should be range bound around current levels. We have already seen a sharp selloff in bonds - that has mainly been driven by fiscal worries, by higher global crude prices which aggravate those fiscal worries and higher global bond yields as well. While we think these factors could still get worse, a lot of selloff has occurred, in our view especially given that we do not expect rate hike from RBI anytime soon and the derivatives market is already pricing in a rate hike as soon as April. So given that context we do not expect the selloff to be material immediately. The Budget details would of course be a crucial determinant here.

Q: Your rate hike expectation?

Joshi: We expect RBI to be on hold. Our expectation for next year's inflation which is '18-19, on the basis of oil price assumptions close to 60, is 4.6 percent which is not alarming. I think some increase in inflation was expected and it is because of base effect. So that just as RBI ignored the base effect when inflation was down so sharply; they will ignore it when it is going up unless there is a big surprise from the oil spike and so on.
First Published on Jan 13, 2018 04:07 pm

tags #Economy

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