RBI unlikely to cut repo rate in 2015 & 2016: StanChart

Analysing the macro data, Anubhuti Sahay, Senior Economist-Global Research, Standard Chartered Bank says that although the headline index for industrial production (IIP) number reported on October 12 was the strongest since 2012, the growth was uneven.If one were to strip out contribution from gems and jewellery, then the growth number would come down significantly and if one were to look at the average IIP growth for April to August then around 20-25 percent was contributed from this sector, says Sahay in an interview to CNBC-TV18.According to her, there was no major surprise from consumer price index (CPI), the only surprise was from food inflation which was marginally higher but was compensated by slower core inflation. Therefore the overall stance for the rest of the year remains unchanged and hence the house does not expect any changes in terms of repo-rate from RBI either in 2015-2016.Below is the verbatim transcript of the interview..Nigel: Let us talk about the first positive data point. The index of industrial production (IIP) numbers they look quite good, positive. But it seems that the positive reading as well was a bit uneven. How did you read that particular data point?A: Undoubtedly the headline number was extremely strong. If you look at the full series then this was a strongest number which IIP recorded since October 2012. But as it correctly pointed out the growth is highly uneven. For instance, if you actually strip out the contribution of the gems and jewellery which is primarily related to gold then the growth numbers come down significantly. For August itself it comes down from 6.4 percent to 4.8 percent. If you actually look at the average IIP growth for April to August, almost 20-25 percent of growth was just contributed by this particular sector.The second important driver is, as we all know, is the auto segment especially the passenger cars and that was the other important bit. In fact if you look at IIP ex-consumer durables the growth has actually slowed down. If you look at the FY15 number the IIP ex-consumer durables was at 5.2 percent, but that slowed down to just 3.6 percent during April to August.So, as you very correctly said the growth is very uneven driven by few sectors especially in consumer durables. Capital goods is also doing a little much better but if you look at the other component such as basic goods, intermediary goods, consumer non-durables; that remains very much on the moderate to weak side.Reema: What would be your expectation for FY16 IIP numbers for the whole?A: Probably, till November 2014 IIP is likely to stay on a stronger footing because there is a favourable base effect at place specially in the month of August. We will also get some support as the manufacturers do some bit of inventory build up before the festival demand kicks in.From November 2014 onwards we would expect the IIP to settle down probably in the range of around closer to 4 percent. Therefore for the year, as a whole we are looking for IIP growth just averaging at 4 percent. Nigel: Consumer price index (CPI) numbers were more or less in line with what the street was estimating. We got a bit of a bonus with the Reserve Bank of India (RBI) governor going ahead and cutting it by 50 basis points. I think you as well were factoring in 25 basis points cut. How does this change the things? What is your sense in terms of the CPI data?

A: On CPI front there were no significant surprises. The headline number was pretty much in line with expectation as well as the market expectation. There was some bit of surprises as far as the internals was concerned. So, yes, food inflation was marginally higher than what we were looking at. However, that got more or less compensated by slower core inflation. So, net-net no surprises and that leaves our overall view for rest of the year pretty much unchanged. That effectively means that we do not expect any changes from RBI either in 2015 or in 2016 as far as repo rate is concerned.

Reema: So, no rate cut all the way till the end of the next year 2016?

A: Yes.Reema: You spoke about how IIP in the month of August was aided by the gems and jewellery, that is the gold segment. What about capital goods? That also contributed close to about 22 percent, that we know is volatile. How would you read the data ex of capital goods and the capital goods spurt that we saw, is it sustainable?A: If you actually look at the capital goods segment that has been growing for past 9 months in succession barring just one particular month where it contracted. So, there has been some improvement, no doubt about it but it is not as stellar as if you look at the growth in consumer durables. For instance, if you just focus at the average capital goods performance for April to August it is somewhere closer to 5.5 percent which has come on the back of 3.6 percent growth for the same period in previous year.So, there is some improvement which ties in pretty much well in line with what we are seeing on import demand for capital goods. It also ties in pretty much in line with what the investment data which CMI publishes and that has shown an improvement in investment since June 2014.So, the capital goods story ties in very well with the investment data as well as the import of capital goods and we do expect this recovery to continue but yes, the kind of 20 percent kind of growth is unlikely to be repeated month after month because that was buoyed by very favourable base effect. So, it will remain erratic but net-net there is an improvement in capital goods production.Nigel: I want to know about pulses, is it a big concern. Monsoons haven't been great, the government has been doing its part because they have been importing a fair bit. What is your take on that front, could it come back to haunt us maybe in the next reading or so?A: Yes, that is one area of concern as far as food inflation is concerned. In fact if you look at our headline CPI forecast for next quarter and the March ending quarter we expect the CPI to move higher towards five percent by December end and then 5.5 percent by end of FY16. Besides the favourable base effect fading away as the positives from cut in retail fuel prices goes out the other important component will be the food inflation.Till now elevated price pressures in commodity like pulses was massed by a very favourable base effect. I agree that has gone away in the month of September but probably in the mismatch in supply and demand domestically with global pulse prices up by 40 percent that can remain a concern going forward and one of the most important reasons why we will see overall CPI moving higher in the months to come ahead.