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Last Updated : Jun 07, 2016 01:34 PM IST | Source: CNBC-TV18

See uptick in inflation risks; another rate cut far: Economists

Decoding Raghuram Rajan‘s commentary, Deutsche Bank Chief Economist (Asia, Global Markets Research) Taimur Baig said room for another rate cut is zero as there is an upside in inflation outlook.

The Reserve Bank of India today kept the benchmark repo rate unchanged at 6.5 percent, saying it would wait and watch even as upside risks to inflation had increased.

Decoding Raghuram Rajan’s commentary, Deutsche Bank Chief Economist (Asia, Global Markets Research) Taimur Baig said room for another rate cut is "zero" thanks to inflation risk.

Backing Baig, Radhika Rao of DBS Bank believes there will be some buoyancy in the May consumer price index (CPI) numbers. She is of the view that the near-term risks persist due to higher fuel prices. Much of that, though, can get abated if the monsoon is positive, Rao told CNBC-TV18.

However, HSBC Chief India Economist Pranjul Bhandari is of the view that uncertainty in terms of inflation is likely to continue even if monsoons play fair.

While Sonal Varma, Executive Director & India Economist, Nomura Financial Advisory & Securities (India), said given the current macro scenario, food inflation might not come down going ahead. She believes transmission of rate cuts is key for economy now.

"How do you ensure that the cuts that have already been delivered actually translates into lending rates coming down because the gap between the lending rates and the risk free rates is actually very wide," Verma said.

Below is the transcript of Pranjul Bhandari, Radhika Rao, Sonal Varma and Taimur Baig’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Latha: What are your key takeaways from the press conference?

Baig: I think that the room for the further rate cut is zero. I don’t think that looking at today\\'s statement, of course, discussion was mostly about the inflation outlook in the upward risk that is accumulating but even if you look at the RBI\\'s discussion on growth, they dismissed the overall industrial production weakness number and focused on the fact that capacity utilisation is picking up, core infrastructure is doing well and business conditions have improved, consumer confidence is on the way up and of course as much as I like to second guess the national accounts data, the fact of the matter is officially this is the fastest growing economy in the world.

So with some uptick on inflation risk and this blockbuster assessment of GDP, how can a Central Bank talk anything about accommodation? So I think that as far as rate cut is concerned, it is all over. I agree with Sonal Varma, Exec-Dir & India Economist, Nomura, the fact that she made earlier that improving liquidity and stuff like that will continue but I don’t think the Central Bank will want to take a risk in lowering the real interest rates any further.


Latha: Is that also your view that there won’t be any more cuts?

Varma: Based on the way the macros are developing particularly the inflation situation, too much hopes that because of good monsoons food inflation will come down might not actually go through. In fact if public investment in infrastructure etc kicks up we might actually start to see rural wages pick up in the course of the next 9 to 12 months timeframe which actually is the biggest driver of inflation.

On top of that you add the fact that minimum support prices (MSP) are about 2 percentage points higher than what they were last year. Oil prices which marginally are moving up and the government has indicated that they will not be cutting excise duty which means that it is going to be pass through to inflation and the fact that output gap is narrowing plus 7th Pay Commission is coming up, I don’t think purely from a flexible inflation targeting Central Bank perspective there is actually any scope for inflation into under shoot 5 percent and therefore any scope for the repo rate to come down.

Like I said it is all about transmission. How do you ensure that the cuts that have already been delivered actually translates into lending rates coming down because the gap between the lending rates and the risk free rates is actually very wide. It is at an all time high if I am not wrong. Therefore, ways to narrow the risk premium that we are seeing has to be the key focus going forward.

Sonia: Pause this time around, but as Latha was pointing out, the RBI has said that there is an upside risk bias to the inflation forecast. How would you read into that?

Rao: Just before the decision we were discussing about this and that was pretty much expected because if you see the April number did jump. In fact, I think there will be some buoyancy even in the May number and apart from services and food inflation, we also seen fuel prices go up to the extent, you remember global oil prices corrected a lot more than domestic fuel prices did because of the fuel excise taxes. So that has also brought in some firmness in the transport and communication consumer price index (CPI). So, in the near-term it is fairly clear that the correction that we saw in inflationary expectation as a result might now hold and you will see some kind of bounce there as well. So, the RBI is well placed and highlighting the near-term risk. Much of that can get abated if the monsoon is positive.

Latha: Now after listening to the governor, is there a sense that the space for rate cuts has reduced?

Bhandari: Definitely, when you highlight upside risks to inflation, it means that you are worried about something. But listen let us just take a step back from here. In the last policy meeting, the RBI had said that they expect 5 percent for the year with very small inter-quarter differences and since then, we have had the mean inflation number which has posted 40 basis points upside surprise, So of course RBI will say that risks are to the upside from here. Also, they had started the year keeping oil price assumption at USD 40 per barrel. It is closer to USD 50 per barrel now and that at once adds about 25-30 basis points to its year end inflation target of 5 percent and therefore another reason for further upside surprises.

But putting this all in context, fuel is 15 percent of the CPI basket. Food is around 45 percent of the CPI basket and therefore, at this point, if there are any forces out there which actually bring down food prices, then they could negate a lot of the upside pressure that the RBI is seeing. And that is why the rains are so critical this time. And one last quick point to make, there is a lot of uncertainty whether or not rains have an impact.

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First Published on Jun 7, 2016 01:21 pm
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