Ahead of the Reserve Bank of India’s mid-monetary policy today, Leif Eskesen, chief economist-India & ASEAN, HSBC says the central bank is likely to hike key rates by 25 bps though he has not completely ruled out the possibility of a 50 bps rate hike as well.
In an interview to CNBC-TV18, Eskesen says the market has already factored in the 25 bps repo rate hike and would be surprised if RBI either does not take any action or goes far more aggressive than expected. He expects RBI Governor Raghuram Rajan to maintain a hawkish stance and continue to treat inflation as their main concern.
Also Read: RBI may hike repo by 25 bps, leave CRR unchanged: Poll
Going ahead, Eskesen does not see key inflation number CPI turning around, though he believes the WPI inflation will remain relatively stable around current levels over the next couple of months.
Below is the verbatim transcript of Leif Eskesen’s interview on CNBC-TV18
Q: Are you expecting a 25 bps rate hike? What would that do to the market?
A: Yes, we are expecting 25 bps and it’s more or less baked into the market so, I would not expect a lot of impact from that if they deliver essentially. It is more likely to react if they surprise either by not doing anything or being more aggressive in terms of tightening monetary policy.
Inflation has been pushing up, not just the last month but over the last couple of months. Core inflation is quite elevated, quite sticky especially when it comes to consumer price index (CPI) core inflation. It is the key concern. Maybe on growth side, on balance there is a bit of better data flow out over the last couple of months, industrial production was a bit weaker than expected but it is quite volatile, the base last year was quite high.
But if you look at the purchasing managers’ index (PMI) reading for services and manufacturing, it was better-than-expected, the Q2 gross domestic product (GDP) numbers were also slightly better-than-expected but ultimately inflation is the main concern. If we do not have inflation coming down from this level but persist at this level, there will be much more growth destruction than tightening of monetary policy over the next couple of meetings.
Q: What would you want to hear from the Reserve Bank of India (RBI) Governor, what would you watch out in his speech?
A: In addition to delivery that they retain a very hawkish stance, they continue to center on inflation being the primary concern and through that signal, they are ready and maybe unbiased to what is doing more tightening going forward.
I think it is important to anchor expectations by also communicating, forward looking that they see the upside risk to inflation still there. Therefore, an attendant need to potentially do more and that is absolutely crucial, but the central bank Governor continues to signal that.
Q: What are you current inflation estimates after the last print?
A: With high CPI numbers, we could get a bit of a decline into the final quarter of the fiscal when it comes to CPI and to some extent wholesale price index (WPI), as we expect some normalisation in food supply. So, the food inflation print could come off to some extent from that but not necessarily by great deal.
I still think CPI headline will remain quite high and also for WPI, they are not going to see much easing from current levels during the remaining couple of months other than through food inflation coming down.
The key thing to look at is what is happening to core inflation, underlying inflation pressures and on that front, both when it comes to CPI and WPI, I do not see core inflation turning around. I expect it to remain relatively stable around current levels over the next couple of months. In CPI’s case that is around 8 percent, quite flattish going forward and so, that will remain a concern.
Q: Do you see a remote possibility of 50 bps rate hike today?
A: I certainly see that as a higher probability than being on hold. It is a possible step they may want to take. They still, maybe on balance would prefer to be a bit gradual in their approach. Growth conditions are better now, there are signs of stabilisation but overall growth remains quite weak at the moment. One thing they may also want to factor in, in terms of monetary policy is that fiscal policy will have to shift to being contractionary in the second half of the fiscal year.
Also, fiscal policy has been expansionary in the first half of the fiscal year, deficit running at 80 percent of the total target. If government wants to reach deficit target they have set for themselves or even getting relatively close – that implies significant spending constraint in the second half of the fiscal year. If they factor that to some extent, that may suggest that they want to continue a more gradualist approach to monetary tightening but nevertheless continuing and continuing to signal and need for continued tightening is necessary.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
