Rate hikes to pause post Dec, see FY14 CAD at 2.8%: BofA ML

Stubbornly high food prices led consumer inflation to rise to phobic levels of over 10 percent and going by the street talks, the wholesale measure is also expected to be way above the comfort zone of policy makers.

In the current scenario, it is widely expected that the Reserve Bank will once again raise policy rates despite slowing economic growth. The RBI had raised benchmark lending rate by 50 bps over previous two months. But Indranil Sengupta, chief economist at BofA ML does not see remission in inflation between now and the next policy meet. "The RBI may raise rates in December policy and maintain status quo thereafter," he said.  Sengupta says the rupee will swing in the wide zone of 60-65 /USD range in the near term while FY14 Current Account Deficit may come in at 2.8% Of GDP. The continuous spike in lending rates by banks have hurt industrial growth and to revive this crucial backbone of the economy, Sengupta advocated rate cuts. Below is the verbatim transcript of his interview on CNBC-TV18 Q: We had that ugly Consumer Price Index (CPI) number of 10.09 percent, but before the next credit policy we will get one more CPI number and two Wholesale Price Index (WPI) numbers. How are you guessing them? Do we remain in double digits? A: I do not see much remission in inflation between now and the policy, so we are looking for a 25 bps rate hike on December 18 and a shift to the repo mode from Marginal Standing Facility (MSF) mode, for money markets. Q: What did you make of the inflation numbers, the CPI numbers that we got yesterday and how much higher do you think it could trend from now until the end of the year? A: We think that CPI should come down to 8.4 percent by March. The increase in CPI is all because of vegetable price inflation, because of onion price inflation. As past experience shows we are seeing shoot up and then they crash. We are now in the shoot up phase, somewhere down the line they are going to fall sharply. So beyond a point while we are making a lot of increase in CPI inflation, much of that is food. Q: To buttress your point the services inflation actually has come down to 6.9 percent in October compared to 7.4 percent in September. So there is a bit of a fall off in the core CPI numbers as well. Will that peter out into 9 percent inflation by the time we come to December-January? Is it only one rate hike that you are expecting? A: Core CPI inflation has always been high, the average is somewhere around 7 percent plus, so one should not use the 5 percent yardstick to judge core CPI inflation. As of now we are looking at one rate hike in December and then a pause. Q: What about Index of Industrial Production (IIP) numbers? Lower than what our polls threw up, but are you seeing any green shoots? A: We were lower and the numbers came in even lower than we thought. Unless you see lending rates come down, you are not going to see industrial recovery. We should be very clear about that. So it is very difficult to look at recovery till at least the middle of next year, because we have got into the busy season with high lending rates and banks are still hiking lending rates because liquidity is tight. So it is very difficult to look at industrial recovery for the next few months. Q: Where do you stand on the current account deficit (CAD) number and what are your expectations from IIP and WPI? A: We are looking at CAD of 2.8% of GDP for this year. We think WPI inflation should come in at 6.9%.