No rate cut on April 1; CPI drop won't continue: Kotak

Ekta: I am going to start with asking you about the trajectory of the consumer price index (CPI) data. Do you think that this is just a flash in the pan and maybe there could be a rise in the core CPI and CPI data simply even led by possibly the hailstorms that we are seeing and the abrupt weather conditions as well?

A: In terms of the core if you are talking about, the hailstorms may not make a difference. However, we will still have to assess the type of crop damages that have happened because of the unseasonal hailstorm. So, there is a bit of a chance that the CPI may plateau out or to put it in a different way the sharp drops that we were witnessing on the headline CPI might not continue.

In terms of the core the bigger issue that needs to be tracked is that the positive sentiment that we are seeing in the marketplace today, if that leads to some amount of build up in the consumption pattern and therefore better growth - given the fact that the output gap is very small at this point in time. So, any small up tick in the consumption can once again lead to an enhancement of the core CPI.

These are certain factors that the Reserve Bank of India (RBI) would definitely be keeping in mind and watching out for the trajectory on all these issues before taking any call in terms of its monetary policy stance.

Anuj: What is your own analysis or your own prediction as we head into the event early next month? Do you expect the status quo to continue and maybe a signal as well that the rate cycle has peaked?

A: Yes, the status quo should continue for the April 1 policy; no doubt at it. We had been sort of underpinning an expectation that the status quo would possibly continue till the Budget is announced by the new government; the full Budget so to say. However, beyond that as I say these are the various factors that could actually shape the inflation expectations.

The other important factor is that the RBI has been very clear about the fact that it is also looking not only at the headline inflation and the core but how inflation expectations pan out. The problem is that if there are expectations that food prices would once again led by whichever component would tend to track up, it doesn’t do too much of a good for the overall inflation expectations model of the RBI which could in process hamper any rate signals from the RBI towards the softening side.

Ekta: What about the core CPI? In terms of a trajectory for the core CPI do you have any sort of figures that you would be looking out for?

A: In terms of the core CPI we are not too hopeful in terms of significant corrections on the downside. Our March 2015 number on the core CPI at this point in time on my model is just a 7.5 percent. Do remember that the core CPI forms mostly the services items like housing, medical, healthcare, education, entertainment and for all these entities it is very difficult to see any significant correction in terms of the prices. So, the pace of downward journey for the core CPI would be quite muted and that is something that I pointed out at the very beginning that any up tick in consumption from hereon could be reversing the trend. So, core inflation is possibly on an extreme knife-edge at this point in time.

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