See 25 bps rate cut in Feb; moderate IIP growth: CARE

He further believes that IIP will continue to see moderate growth for the rest of the year.

Below is the verbatim transcript of Madan Sabnavis's interview with Reema Tendulkar and Sumaira Abidi on CNBC-TV18.

Reema: Based on the way crude has fallen plus the pick up in growth IIP has indicated, the continuous decline that we have seen in consumer price index (CPI) – have you advanced your expectation of when the first rate cut will come from the Reserve Bank of India (RBI)?

A: It is the right time for the RBI to lower rates at this particular time because the CPI Inflation number has gone downwards. However, based on certain indications which have been given by senior RBI executives sometime back that it is not yet trying to celebrate that inflation is down. It looks like the RBI is cognizant of the fact that the base effect is going to wean-off very soon and from December–January onwards the number could be moving in the upward direction.

However, still I do think that even though the number would move upwards we would well be within the range of 6 percent and there would be a good occasion for the RBI to reduce rates but that would happen in the next quarter of the calendar year.

Sumaira: You think by at least mid 2015 we could see retail inflation falling below that RBI target of 6 percent if not the first quarter?

A: A lot would depend upon how the rabi crop fares. As of now the kharif crop is not expected to perform as well as it did last year based on the estimates put up by the ministry of agriculture. So, to my mind the wait and watch is basically to see what would be the impact on food inflation on account of lower production of cereals, pulses and oil seeds. I think these are the three categories which are expected not to do as well as last year.

However, based on the fact that crude oil prices have been coming down and will probably remain in this particular range of not lower and if I get the rabi crop could be normal we could take a call that interests rates will be aggressively lower in next financial year. However, for this financial year nothing more than 25 basis points in the next policy probably in February.

Reema: You are worried that the core CPI inflation did not ease down, in fact it was unchanged at 5.8 percent and if growth picks up it could put further pressure on core CPI. You do not think that will be a determinant?

A: It would be a determinant but given the fact that demand conditions today in the economy are fairly slack, so if you just juxtapose the IIP numbers, the disappointing aspect has been that consumer durable goods have been registering negative growth rate and overall consumer goods have been growing at a negative rate. So, demand is going to get remained tempered.

So, therefore core CPI inflation may not be a major issue for us in the next couple of months or probably even for the rest of the financial year. What we would be looking our for more is food inflation because that has been the worrisome factor in the past and the RBI will definitely be looking more closely at the food inflation number rather than the core inflation number.

Sumaira: You said that you expected 25 basis point cut in February. For the entire 2015 what would be the accumulated sort of cut that you expect? This time we saw a low inflation for sure but when do you see a definitive trend reversal in inflation prices?

A: If you look at the way in which inflation has behaved in the recent past, when I say recent past maybe the last three or four years, I think they are two determinants of inflation. One is the food part and the second is the fuel part over which we do not have any control. So, what happens to both food and fuel have to be monitored on a quarter-by-quarter basis, harvest-by-harvest basis when you are talking of food inflation and crude oil price probably on every quarter basis to see what are the geopolitical situations like which is driving these prices.

So, therefore I don’t think they will be any particular position in which the RBI or anyone can say that inflation has been conquered and that we are in a range of say 5-6 or any particular number which we are talking of. It is going to be a very dynamic number, the way in which we are influenced by global factors as well as the domestic monsoon. So, therefore I don’t think we will be very confident at any point of time to say that inflation has been brought under control and we will have to take it season-by-season.

Reema: What about growth, what is your estimate of how IIP will trend from hereon, that is from the October till the end of this fiscal year in March? Can it sustain the momentum that it showed in the month of September?

A: To our mind we are looking at an IIP growth number in the region of 3-4 percent for the entire year and that is just going to be moderate growth because we have a negative number last year coming to 3-4 point will not be something to rejoice over. However, the major concerns which are there are more on the consumption side, on the investment side and while the capital goods have shown certain signs of improvement coming over a negative base we would tend to believe that certain investment decisions taken by the government especially in terms of clearance of projects might have played its role in bringing up this number.

However, we need to wait and see whether these kind of trends persist for the next couple of months before we can be sure that the investment cycle is taken off. However, we need these two factors to increase significantly and what we are seeing of consumer goods, the picture is not very encouraging because even for October the auto sales numbers which are available don’t really show that there has been an uptick. So, it will be a very moderate and modest kind of a gradual growth pick up in the region of 3-4 percent for the entire year.