Consumer price inflation eased faster than expected to a three-month low of 9.87 percent in December from 11.24 percent in November, driven by a moderation in vegetable prices, government data showed on Monday.
Sajjid Z Chinoy, Asia Economics, JPMorgan says the main disinflationary force has been the cooling of vegetable prices. Retail vegetable prices have corrected by more than 30 percent and the first 10 days of January has already seen another 20 percent cooling. But, he adds: “The key is going to be how core CPI evolved, because the Reserve Bank of India (RBI) had two criteria last month for staying on hold, one was a substantial moderation of the headline rate which prima facie has been achieved, this is a 130 bps moderation in the headline rate, but the second criteria was whether that core inflation should fall, non-food, non-fuel, so it will be interesting to see how that is printed.”
Also Read: December retail inflation slows to three-month low
Tirthankar Patnaik, Religare says the market had already factored this in the morning when the Nifty went up around 100 points. He expects the central bank to maintain a pause on rates on January 28. "Our thought process is that 8 percent on the repo, 9 percent on the MSF will be the peak rates that we can look at and I do not think that is going to happen during this policy rates," he elaborates.
Indranil Pan, Chief Economist, Kotak Mahindra Bank too feels the interesting thing to watch out for would be what happened to core inflation ex food and ex fuel.
Jayesh Mehta, Managing Director & Country Treasurer, Bank of America, does not expect much of a change in bond yields tomorrow. He believes people will stop talking about a rate hike at least for the January end policy and there would be momentum for further softening of inflation as prices have come off on the food side even now.
Below is the verbatim transcript of Sajjid Z Chinoy, Tirthankar Patnaik, Indranil Pan & Jayesh Mehta's interview on CNBC-TV18
Q: December Consumer Price Index (CPI) has come in at 9.87 percent vs 11.24 percent on a month-on-month basis. What is your reaction to that?
Chinoy: This is quite close to what we were expecting. We were at 9.7 percent for the month at the lower end of the spectrum and clearly because of the reasons you mentioned, what you are seeing is a more than 30 percent correction in retail vegetable prices around the country and so the only question was how much of that is captured in the CPI for December and how much of that will be captured in January.
We are seeing in the first 10 days of January another 20 percent correction in vegetable prices, so that is the main disinflationary force in the numbers. The key is going to be how core CPI evolved, because the Reserve Bank of India (RBI) had two criteria last month for staying on hold, one was a substantial moderation of the headline rate which prima facie has been achieved, this is a 130 bps moderation in the headline rate, but the second criteria was whether that core inflation should fall, non-food, non-fuel, so it will be interesting to see how that is printed.
Q: What are your thoughts on the food and beverage inflation which has come in at 12.16 percent?
Chinoy: Quite similar to what we had thought, because that suggests a moderation of about 2.5 percent month-on-month which is broadly in range we have picked up which also then translates into vegetable price moderation of somewhere around 17-18 percent in the index in December, so no real surprises on the food front. This is undoing what happened in the previous months, food prices went up almost 2 percent each of the last two months, so this has undone that. I do not think the headline revision of 11.16 percent vs. 11.24 percent is material. The key is going to be where has core CPI printed.
Q: What is your call on how the market would possibly factor this in or is it already factored in?
Patnaik: The markets factored it this morning when the Nifty went up around 100 points. You are seeing some amount of positive response from the markets already.
Q: In your sense then how do you think the RBI would move? Is there more of a likelihood that they would possibly hold; that is what the consensus is now?
Patnaik: That is our call as well. We are expecting the central bank to maintain a pause on rates on 28th, but we should remember that the central bank has very clearly said that they do not hereby depend upon credit policy dates to make the rate moves. Our thought process is that 8 percent on the repo, 9 percent on the MSF will be the peak rates that we can look at and I do not think that is going to happen during this policy rates. Importantly, core numbers are important for CPI and our primary calculations are showing that while CPI numbers have come off to sub-10 percent number, a single digit number is very good, the core inflation has marginally accelerated to about 8.05 percent prima facie. So that is a worry.
Q: If I am not mistaken this core CPI would then be flattish, but there would be a marginal uptick at 8.05 percent which compares to around 8 percent on a month-on-month basis?
Patnaik: That would be right. Yes, it is flattish but there is a marginal uptick from about 7.9 percent odd levels to about 8.05 percent.
Q: Your thoughts?
Pan: We were looking at 10.2 percent. Anyways we were looking at the vegetable prices being the main influence on the overall headline inflation number. As you rightly pointed out with this having been satisfied the next thing that we need to look forward to is what has happened really to the core inflation which is ex food and ex fuel inflation. There the RBI was expecting a drop anyways and these are the two conditions that the governor had clearly said would be essential for him to stay on a pause. So, apart from the headline number which has cooled off significantly I would be waiting for that number too.
Q: Do you think that the RBI would be satisfied with this number? What is the number you think which they would be most comfortable with?
Pan: For RBI, one of the conditions laid out in the monetary policy statement has been clearly achieved. As Sajjid has also been mentioning that the core is dropping of very marginally for us also in our projections. There the key issues are also things like say miscellaneous items which as a group would include education, medical care, entertainment and all these things for which there is no sense that we are getting that it would cool off. In fact, prices are quite firm over there. While the overall headline inflation has dropped off it would be very difficult to sort of understand and analyse what is the implication of this on the core. So, we will have to definitely wait in terms of satisfaction for the RBI from both the numbers rather than just one number.
Q: What is your indication of how WPI could pan out on the headline figure as well as in terms of what your expectations on core WPI would be? Would it change seeing the CPI data today?
Pan: Not really. In terms of the headline we were anyways looking at a 7.01 from a 7.52 previous reading. On the core we were once again expecting a very small downtick compared to the previous months. So, as Sajjid has been clearly pointing out it is getting relatively closer and closer call in terms of the RBI and we really need to sit back and sort of factor in the core WPI numbers. It is a very difficult and a close call before the RBI beyond that.
Q: Where do you think that the yields will soften to come tomorrow's trade?
Mehta: Tomorrow we will not see much difference. Maybe we will see yields of course softening by 2-5 bps depending on how it takes in the morning, but very clearly people will stop talking about a rate hike at least for the January end policy and there would be a momentum for further softening of inflation as prices have come off on the food side even now. So the January numbers also would reflect that and that is where the market is going to price. So overall looking at yield going down maybe another 10-15 bps in the matter of next one month.
Q: So you are saying that RBI's possible hold is not factored into the bond markets at this point in time and there could be a further rally maybe post-January 28 or up to January 28?
Mehta: Up to January 28. I think now people will no more talk about rate hike, at least that would be out and there would be a further softening of inflation. Of course we have a headline number coming on Wednesday morning, so let us see how that comes with WPI number and even if that trajectory is downward then the momentum for bonds to go down by 10-15 bps will definitely continue.
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