Inflation may dip in the near-term but is likely to surge by the year-end, believes Indranil Sengupta, Chief Economist India, BofA-ML. He expects the Reserve Bank of India (RBI) to cut 75 bps (0.75%) by April 2016. According to him, the RBI will cut rate in June and will then pause for the Fed hike which is expected in September and then there will be another 50 bps of rate cuts in early 2016.
In an interview to CNBC-TV18, Sengupta said the gross domestic product (GDP) growth is currently in the range of 7.5-8 percent and the average inflation is currently between 5 and 5.5 percent. He is expecting 3 percent for Index of Industrial Production (IIP) data in February which will be released Friday. He is also anticipating 5.1 percent for March consumer price index (CPI) data which will be released Monday.
Below is verbatim transcript of the interview:
Q: First thoughts on governor’s inflation forecast and his monetary policy stance, 5.8 percent at March 2016, has he overestimated the trajectory and what space for rate cuts?
A: We are looking at 75 bps of rate cuts by April 2016.
The RBI cuts in June and then they pause for the Fed hike which we expect in September and then we see another 50 bps of rate cuts in early 2016. If you look at the inflation trajectory I think we are more or less the same.
We see inflation coming down now towards end 2015 inflation will go up again on base effects, so the average inflation will be somewhere around 5-5.5 percent. Of course towards 2016 you could see 5.8 percent. Overall, the RBI will look at the average inflation as well.
Q: Will 5.8 percent give you a 6.75 repo rate? That will be 90 bps and the governor has been insisting on a difference of at least 1.5 percent between the inflation rate and the repo rate?
A: We have to see where the average is because that is what they said, they will look at the entire trajectory and of course all these numbers are up in the air but given that optimal consumer price index (CPI) inflation is around 6.5 percent, I think the rates could go down to 6.75 percent.
Q: Apart from the measures that the central bank took at the RBI policy, some other directives were issued as well. One of them was banks will now be permitted to invest in long-term infra bonds issued by other banks then setting up of an independent benchmark administrator, guidelines on the competitive pay for non-executive directors, I am just trying to understand, outside the rate cut measures, how have you assessed what the RBI has done so far and how much it could help the macros?
A: These are all welcome steps. They are all whether you are talking of improving and deepening the bond market or whether you are talking about improving the quality of bank management but then that takes time to feed into the macro. So at this point in time, I think what is important is that the RBI has been cutting rates and the banks have started cutting rates with the slack season coming in.
Q: What are you pencilling in by way of growth? The Central Statistical Office’s (CSO) numbers are making everything a little more difficult but now we have started talking in terms of how much FY16 will be better than FY15? If we take that safe question, what is your trajectory?
A: We are looking at something around 7.5-8 percent. So I would put the midpoint at 7.8 percent.
Q: What is the expectation on the currency itself? Yesterday, the governor said that only if there is relentless appreciation, he would be worried, it is not panic yet were the words he used?
A: I worry far more about fx (foreign exchange) reserves than appreciation. I think the RBI is buying fx reserves and we are approaching 10 months import cover. The RBI will continue to buy fx reserves for the foreseeable future.
Rupee could weaken in the next few months because A] you have the seasonality going against you. B] As a house we think that the dollar will strengthen towards parity in December. And C] Quarterly results may not be great. So all these things put together argue for a weaker rupee so maybe the rupee goes to 64 per dollar by September.
Our view is that the RBI will keep on buying fx reserves between 60 per dollar and 62 per dollar maybe they don’t do much between 63 per dollar and 64 per dollar and they intervene heavily at 65 per dollar.
Q: What are you expecting for this month’s IIP number which comes out today and the CPI number?
A: We are expecting 3 percent. We are pretty much in line with consensus.
Q: But indicating some minor uptick?
A: That is partly also the base effect playing out. For CPI we are expecting 5.1 percent, which is below consensus. The good news is that if you keep looking at the daily data for food prices, there has been no reaction yet to these rains, it would be something that could happen later but there has been no reaction so far.
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