Indranil Sengupta, chief economist –India, Bank of America Merill Lynch is expecting the consumer price index to come around 9.4 percent and the wholesale price index, that will be realeased on Wednesday, to come in at 6.5 percent.
Speaking to CNBC-TV18, Sengupta says inflation in India has peaked and it will come down meaningfully in the second half of 2014.Sengupta further adds that the central bank- Reserve Bank of India- is likley to hold rates in its January 28 monetary policy, but will cut rates from mid-2014.
Below is the edited transcript of Sengupta’s interview to CNBC-TV18.
Q: What is your house call in terms of today’s data, what is the consumer price index (CPI) number that you are expecting?
A: We are looking at 9.4 percent for December CPI today and 6.5 percent for Wholesale Price Index (WPI) on Wednesday.
Q: You are slightly lower than our poll, our poll is suggesting that it will still be double digits about 10 percent plus but be that as it may inflation will cool off as we all know. Do you think inflation has peaked out for the near-term or is there a chance of any supply shock that has the potential of flaring up food prices say in the next couple of months?
A: We think that inflation has peaked off but probably will really come down meaningfully in the second half of 2014. Supply shocks are difficult to predict but one crop people should watch is palm oil.
Q: So based on today’s inflation print if it does come below the 10 percent mark or at the 10 percent level how do you think the governor will react and what will be the call be in the next policy?
A: We expect a pause in the next policy and expect the RBI to cut rates from the middle of 2014.
Q: The market today is reacting both currency and equities in terms of the US non-farm payroll data. Do you think the currency will get further leg up now? What is your call in terms of where the US is headed in terms of tapering, interest rates and what that might mean for countries like India?
A: We think that the US economy is actually improving not withstanding the weak payroll data. Furthermore, we think that the US Fed will continue to taper at USD 10 billion per meeting and finish tapering by the end of the year. We think that the rupee will be in a 60-65 against the dollar from here on.
We also have oil swaps maturing of about USD 7 billion, we have corporate FX repayments of around USD 5 billion, so that is something to take note of as we go forward.
Q: There is the other subject that is plaguing the market a little bit is this whole fiscal deficit issue, there is so much talk and conjecture about how the government will go ahead and bridge the fiscal gap, it is clamoring to meet its divestment target etc, what is your view on whether that 4.8 percent number will be met? Secondly, how the government is going about the entire divestment issue?
A: I guess they will meet the fiscal deficit target since that is what they have said. We do expect a cut back in expenditure for meeting that target. Had the government continued with the planned expenditure, the fiscal deficit would have probably been closer to 5.5 percent. But I presume they are going to cut back on their expenditure and meet the 4.8 percent target.
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