See Nov CPI at 4.2-4.3%, Oct IIP at 1.5%: Kotak Mah Bank

In an interview to CNBC-TV18, Indranil Pan, Chief Economist at Kotak Mahindra Bank, said he sees a rate cut from RBI in Q1CY15 and expects rupee to touch 63 against dollar by March-end.

Below is the transcript of Indranil Pan’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.Ekta: Could you just detail what your expectations are on both consumer price index (CPI) as well as Index of Industrial Production (IIP) and what is resulting in those estimates that you have? A: CPI we are looking at 4.2 percent or 4.3 percent. The key input to that is core doesn’t really change too much on the downside because we are talking about the downside only at this point in time. Once again the vegetable prices were relatively softer into November compared to October so there is a month-on-month correction that we have taken on the vegetable prices which is leading to a 4.2 or 4.3 percent. It is 1.5 percent positive for us on the IIP with components such as the consumer goods continuing to be on the negative side while we are expecting some bit of an uptick on the capital good side because of the volatility which is there month-on-month. So, that is the reason why we are expecting capital goods on the higher side. However, overall the number on the IIP remains low at 1.5 percent.

Anuj: Based on these numbers would you believe that the rate cut that the Governor hinted is on course in the first quarter of next year? A: First quarter maybe yes, within the first quarter is what we are looking at a rate cut at this point in time. The key debate at this point in time is whether it is January, February or March and we are still holding on to a belief that it is likely more on the March side rather than the January side. So, relative probability is higher for a March cut than a January cut and the reason why we believe so is the fiscal continues to be worse. He has clearly highlighted in his previous policy that he would watch out whether the current achievements in terms of the fiscal are there and therefore the next year’s fiscal numbers in terms of both the quality and quantity would also be brought into perspective. So, I would hope for a first week of March because he has kept open the timing in terms of beyond policy dates also.

Ekta: I wanted to focus on the base effect for the November CPI data. How much of the 4.2-4.3 percent will be on account of a base effect? What is the month-on-month trajectory that you are expecting in the CPI data? A: Base effect is a very difficult call to take in terms of what is the exact content of the base effect in this. However, having said that, some four months back before the huge drops in inflation had started to happen we were anyways looking at a 200 basis points correction or 150 basis points correction up to November to a floor of say about a 6.5 percent by November. So, now if the number comes out to be about 4.2 percent, I would still say that there would be around 100 basis points on account of the normal deceleration in the inflation that we are talking about and maybe the rest would be base effect. Going forward the base effect going away we are more inline with the RBIs Fan Chart in terms of the inflation projection for the next year which is about 5.5 percent for December and building up to about a 6 percent for March 2015.

Ekta: We have suddenly seen the rupee now take some of the depreciation that it has been resilient to for most of the year and it is now trading at a 9-10 month low. Your sense on whether we will see further depreciation on the rupee and maybe what is currently taking place with it? A: We had put out a recent report, not too long back, just about two days back where we had predicted that the rupee needs to be on a depreciation bias for whatever time period that you talked about. We were looking at 63/USD by end March 2015. Now that the rupee is already at 62.40/USD we might have to extend that towards a 63.50/USD. However, having said that, the clear cause for the rupee’s depreciation is the relative appreciation bias of the INR against most of the Asian currencies. Most of the Asian currencies had been depreciating relatively sharply consequent to the Yen movement and consequent to the movement in terms of the dollar. Overall, there is once again a sense of a risk aversion with the Greek political issues on the surface. So, Greek yields are also sort of going up. Yen also is suffering from a political issue and therefore the Yen is also on a depreciation path. One of the major themes for 2015 would be the timing and the pace at which the US hikes especially that has come into better focus now with the retail sales data of yesterday and the jobs growth data of the last Friday. So, that is also building into an overall dollar strength story.So, I would continue to expect depreciation bias of the rupee and as I said 63/USD is what we have put but it maybe sort of advanced further towards 63.50/USD.