Inflation pace slowing; Jan-Mar CPI around 6.5%: Macquarie

Latha: Your take on inflation numbers. Has the back of food inflation been broken, how would you draw the curve here on, say, for end March and further on the rest of 2015?

A: On the inflation number, specially on the Consumers Price Index (CPI), if you look at the 5.5 percent number it was definitely a very good number and going forward the way we are seeing is that lower global commodity prices, we have seen that oil prices have been pretty subdued and below USD 85 a barrel as well as lower food prices are all helping in bringing down overall CPI inflation specifically with respect to food inflation right now because of base effect partially we are seeing lower food price inflation and at the same time the lower minimum support price, lower rural wages and some support on part of the government to improve the demand-supply dynamics is also helping bring down food prices.

Going forward when adjusted for base effect especially our view is that this 5.5 percent CPI inflation number which you are seeing will start rising back again. Between January to March, I am looking at a CPI in the range of close to 6.5 percent which is still better than Reserve Bank of India’s (RBI) first target of 8 percent by January 2015.

So I will say inflation momentum is clearly decelerating. The government effort, fiscal consolidation, moderation in rural wages and at the same time based in terms of lower global commodity prices are all helping to bring down inflation over the coming months.

Latha: You don’t have a number?

A: If you look at the trajectory of inflation, I would say January to March it is somewhere around close to 6.5 percent. Our estimates are suggesting that if commodity prices are remaining where they are and between April to December my average CPI inflation will be in the range of 6-6.5 percent which is very close to the RBI’s medium term target of 6 percent by January 2016.

So definitely that will provide some leeway to the RBI to go ahead and cut policy rates in calendar year 2015.

Anuj: What about growth rates, because we haven’t really seen any kind of pick up on that as well. We will have the Gross Domestic Product (GDP) data soon. What is your overall estimate about growth for the next financial year?

A: If you look at the growth we are at 5.4 percent GDP growth estimate for FY15 and 6.5 percent GDP growth estimate for FY16. If you look at real economic activity it will take some time to recover. Even though India has already seen some nascent signs of recovery but in terms of actual real activity picking up to be reflected in growth numbers it is still one or two quarters away.

So if you look at the GDP growth for the next quarter i.e. September quarter our estimate is that GDP growth actually over the September and December quarters will be largely in the range of 5.1 to 5.3 before in terms of actual growth recovery the numbers are showing a meaningful pick up from the March 2016 quarter onwards.

So, I will say now going forward next two quarters growth will remain moderate but in terms of activity picking up we are seeing signs that economic activity is showing incipient signs of revival.

Latha: So your Q4 number will be how much GDP. That is when the turn comes?

A: Yes, we are expecting in the range of 5.6 to 5.8 in Q4 but in the next two quarters close to 5.1 to 5.3.

Latha: You said that you expect calendar 2015 is when the Reserve Bank will cut. Will that be as early as February or will it be April. What is the expectation further down after monsoons?

A: If you look at our expectations largely we are expecting a 50-75 basis points cut starting from the June quarter i.e. from the months of April onwards. Yes, but if the oil prices remain subdued and we really have to see the inflation numbers post December when the base effect actually starts getting adverse and then that will actually show you what is the exact inflation momentum. I would say base cases April onwards but yes, if the inflation momentum is showing clear signs of decelerating adjusted for base effect. It might be pushed forward to somewhere around February onwards.

Anuj: Last week we had the excise duty hike on petrol and diesel and the government clearly looks like it wants to make up for the lack of tax collections. Do you see some more moves like this in the future?

A: If you look at the fiscal deficit math right now obviously the next tax collection growth is only 5 percent year-to-date (YTD) and the targeted growth which is budgeted is around 20 percent which the government will like to achieve in the full year. So definitely in that scenario the fiscal deficit number looks definitely challenging. But if you look at the overall government expenditure it is running way behind the target. So yes, this is one mechanism whereby the government will get somewhere around Rs 110-130 billion that will add to its revenue collection kitty but I am not so much worried about the fiscal deficit and the government’s ability to be able to achieve it.

Right now if you look at the RBI’s annual dividend transfer the amount of savings you are getting on the oil subsidies alone at the same time we are expecting some progress on divestments over the next three to four weeks we should start seeing some visible effort all that will help government to be able to achieve a 4.1 percent fiscal deficit for this year.

Latha: Where do you see bond prices headed, say, by December 31st or by March 31st? Do you think the yield can go below 8?

A: Right now if you look at the 10 year bond yield they are any which way expecting a lot of market consensus is that RBI will be moving on the rate front too quickly because of whatever we are seeing on the CPI inflation front which is giving some leeway to RBI that the policy rates might be coming down much more quickly than what the market is expecting. I am largely of the view that even though in this frame of cycle as and when easing comes it won’t be very aggressive, maybe 50 basis points and even if to the highest extent I would say 50-75 basis points. So I am very comfortable with the yield right now at the range where they are right now.