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Last Updated : Jan 09, 2015 09:23 AM IST | Source: CNBC-TV18

RBI should wait till Budget before cutting rates: Deutsche

Baig believes the December CPI data for India could be seen around 5.5 percent with similar levels expected in January CPI as well. Going ahead, he expects mid to low-5 percent inflation over the next two-three months.


The falling of crude price to below USD 50 per barrel levels is a windfall for commodity importing economies, believes Taimur Baig, chief economist, Asia, Deutsche Bank AG. According to him, the correction in crude prices is unlikely to be as dramatic for India as for the US and Japan.


In an interview to CNBC-TV18, Baig says the December consumer price inflation (CPI) data for India could be seen around 5.5 percent with similar levels expected in January CPI as well. Going ahead, he expects mid to low-5 percent inflation over the next two-three months.


On expectation of rate cuts, Baig believes the Reserve Bank of India must wait at least till Budget before cutting rates.

Below is verbatim transcript of the interview:

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Q: How should one understand the seminal fall in crude prices? Is this going to be a year of lower global growth than last year or is crude alone in a picture of its own?


A: It is a mixed bag. Of course, lower crude price is a great windfall for all commodities importing economies and the wealthier the economy, the bigger the impact. So if you look at the US or even the Japanese consumers’ wallet, the price decline immediately translates into a pick up in discretionary expenditure elsewhere.


For not so wealthy economies and I have developing countries in Asia in mind, the impact is more dramatic on the macro side than on the consumer pocket book side.


It is not likely that the Indian consumer on average is going to go out and spend a lot of money just because petrol prices are falling. This is because petrol or diesel prices don’t make up very large part of the consumer index. For example, the consumer price index (CPI) for India, it doesn’t even show up in the transportation index, it is under miscellaneous.


A big impact on consumer demand or a big impact on company profitability will have to see how it transpires in the developing part of the world in the advance economies, it is a very big plus but your question which is what does it mean for overall global outlook, it is mixed because you will see a quite a bit of collateral damage among the commodity producing economies.


Finally, we should realise that it is not just a supply-driven phenomenon that is causing this decline in commodity prices, there is a big demand component stemming from China where week after week, we are getting more and more worrisome data about outlook, we ourselves now see Q1 in China being sub-7 percent.


So the biggest source of demand for the whole world for the last two decades has been China and that is weakening and that can be a very good news even if low oil prices is a good news.

Q: By how much will the fuel go down because of the big fall that we have seen in crude? How much will it aide the twin deficits?


A: In case of India, we have talked about fuel subsidies ad nauseam for many years but they don’t make up that big a part of the Budget. The overall total energy subsidy bill for India used to be 0.91 percent of GDP.


After the diesel price and petrol price fall that began in 2013 with the previous government, by the time we came along to 2014-2015 fiscal year, we are looking at no more than 0.6 percent of GDP and that is long before this fuel price decline came in.


We are starting with a low base. It is not an area where you can have very large savings. We think the best we can see for this fiscal year is about 0.2 percent of GDP instead of 0.6 percent, which is about 0.4 percent overall energy subsidy bill this fiscal year.


For next fiscal year, there may be another 0.1-0.2 percent because as you head towards zero, you cannot go much lower. You still have LPG subsidies, you still have some degree of kerosene subsidies. So the scope for saving is not very large. Import bill of course will fall and there is very big impact on the current account but the fiscal impact is not that large.


Q: For these and other reasons trace out the inflation trajectory for us. You pointed out that in any case fuel is not a very big part of the consumption basket, how do you therefore see the CPI trending this year?


A: When we look at historical data whether it is wholesale price index (WPI) or consumer price index (CPI), the fluctuation in fuel prices haven’t had very broad impact on second run effects. You don’t see transportation prices going up exactly in line with fuel prices and hence I don’t see transportation prices going down substantially with the decline in fuel prices either.


The December inflation data is the one that we need to focus on where we have an adverse base effect and we will see inflation rebound. Will it rebound to 6 percent, it is unlikely, given the ceiling that is being imposed by weak commodity prices. So I think more like 5.5 percent print for December and something like that even for January-February.


The other big relief that comes on the CPI/WPI side of the year is from food. Seasonally, these are good months for food but we have advanced that correction already in November/December after the spike that we saw in August/September. So the likelihood of further decline in food prices is unlikely. We follow food prices on a daily basis and the last two-three weeks data does not suggest any further downside to food anyway.


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Q: Are you looking at sub-6 number by March 31, what will be the numbers for December and January?


A: December is 5.5 percent and again 5.5 percent for January. Now what happens in February/March, some of the adverse base effects will start fading and we could head towards low 5 but we will have to see what happens with food prices because that implies huge seasonality or very favourable seasonality on the food side, which may not be the case this year. This is because we have already seen the food price correction.


This mid-5 to low-5 inflation is where we will be for the next two-three months unless we see further dramatic decline in global fuel prices and that leads to knock on domestic declines.


Q: What are the guesses on the rate cut from Reserve Bank of India, the timetable and the numbers?


A: We haven’t talked about fiscal other than the fuel subsidy issue but I think the issue is a source of great deal of concern to us. Beginning from last month, we have started seeing the minister of finance also start echoing some of our concerns. So I think RBI also sees exactly the same situation.


There are some uncertainties on the revenue side, there is some uncertainty about what is happening with the deficit and what the government will do with respect to its deficit target. So if I were in the RBI shoes, I would wait till the Budget which pushes the first rate cut in this cycle to March.


Q: There is a lot of optimism in the north block with respect to the fiscal deficit target being met, that is because there are expectations that revenues from the spectrum auction will be higher this time around. What is your own estimate of whether that 4.1 percent number will be met and how much could come in from the auctions?


A: The authorities can make 4.1 percent official document. We saw similar set of heroic numbers in the last year’s budget as well but that would be a poor quality number in the sense that it will be a function of arrears, postponed expenditures and of course huge amount of cut back on planned spending.


So I don’t have a very strong view on how much money can be raised on the spectrum auction but I do have great deal of concern about the 0.6 percent of GDP worth of disinvestment revenue that the authorities have in mind and we are almost half way through January, 10 weeks left in the fiscal year and nothing has been raised so far.

You should think about the crown jewels that the authorities want to disinvest, they are all commodity related. So the timing could not have been worse unless you have domestic players picking up. For example LIC picking up the shares of Coal India or something like that.


Any case, these are poor quality adjustments, we see disinvestment as one-off, that should not be considered as a part of the sustainable improvement in fiscal and cut back in planned spending as the chief economic advisor pointed out as it is negative for the growth. So that is also not a very good way of achieving 4.1 percent but the short answer is that they will achieve if they want to.


Q: What is the inflation trajectory for FY16? Do you think we remain at 6 percent as RBI had forecasted or will we get a slightly lower number and therefore, for all of 2015 calendar, what are the likely rate cuts?


A: We all should be very humble about the inflation forecast of India seen last year; how when we were dovish, it went up and by we, I mean the RBI and the analyst community and then we got very worried and it came down. So we should add a great deal of confidence into any inflation forecast for 2015 and 2016.

If food prices remain well behaved and fuel continues to trend downward we can hang around in the 4.5-5.5 percent range for the rest of the year. This would mean the glide path of RBI is very much in place and if some sort of a legal framework is provided for RBI, it can credibly announce a 4 percent plus-minus to a target whether that happens, I think it is beyond economies or inflation forecast, I think the central government will have to weigh in very heavily on that issue but that is probably a subject for another day.



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First Published on Jan 8, 2015 10:25 am
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