See elevated inflation till April, 25 bps repo hike: RBS

The Consumer Price Index is at a nine-month high of 11.24 percent, while factory output shrank 1.8 percent. The core Consumer Price Index inched down a little, it is still not enough for the Reserve Bank to not hike repo rate by 25 basis points, says Sanjay Mathur, Head of Research & Strategy, Non-Japan Asia, RBS. Core CPI is at 8.94 percent versus 8.1 percent month-on-month.

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He expects inflation print at the core level to fall to around 6.5 percent by late 2014. However, he says inflation will remain elevated till April. Below is the verbatim transcript of Sanjay Mathur's interview on CNBC-TV18 Q: What is your reading of the inflation number? Do you think the fact that core Consumer Price Index (CPI) has inched down a little will give the Reserve Bank of India (RBI) any handle to stave off a rate hike?
A: I think so. When you dissect numbers clearly the usual suspect was food price that was driving the inflation up and clearly the decline or the moderation that you see in the core component of CPI is generally welcome. That said even the derived number of 7.8 percent is not low enough at this point in time to say that RBI will not move on next week. I do think that a 25 bps increase is definitely on the cards. Thereafter it is possible that we get a pause or a completion or the conclusion of the tightening cycle.
There are a couple of encouraging signs in the inflation numbers. We can see services inflation is starting to moderate. We are starting to see the accommodation component moderate and these are areas which are directly within the influence of monetary policy, so far we are at the tail end. The other thing to keep in mind is that one of the problems we have with CPI or its after effects is that basically we are not seeing an increase in deposits, because people just do not want to be in something that was giving a steeply negative return. If you look at the latest data, it is starting to show that deposits are moving up and that is an encouraging sign. Q: What happens to the trajectory of inflation going ahead? How do you see that pan out? The bigger fear is that the inflation trajectory on the downside may not pan out as was expected earlier because of this print.
A: I agree that I think that inflation remains fairly elevated at least until April and then it starts to moderate in a more appreciable or a stronger way. But I do think that by the time we get to late 2014 we could be sitting on an inflation print at least at the core level at around 6.5 percent or so which should be acceptable for a developing economy like India, especially keeping in mind there are number of supply constraints. Q: What is the growth trajectory for you? Do you think we troughed out at 4.4 percent? More importantly, do we remain for a relatively long period in this 5 percent figure?
A: I think so. That is certainly the case. We are fairly comfortable with the notion that growth has troughed out. We will get some support from agriculture and also the fact that the government has somewhat increased the pace of clearance of projects. We have troughed out, but do we see a massive jump in growth, I guess the answer is no. The reason for that is when we look at the GDP numbers that came out a couple of weeks ago, when you look at it from the expenditure side there was such a large contribution that was coming from net trade. For an economy like India which actually has a very small trade to GDP ratio, the turnaround will lie on investment and consumption moving up sharply and that is something that is going to be missing in a significant manner for at least 2-3 quarters more. Q: How many rate hikes do you expect from now for the next 6-8 months? Has that estimate changed?
A: No, it hasn't. We stick with the fact that we get 25 bps next week and another 25 bps and we will take a look at it again once we get a clearer picture on which way vegetable prices are moving and core if it is panning out the way we are imagining it right now. There has been some encouraging news that onion prices are finally beginning to moderate.