WPI won't hit exports, high food prices may stay: Experts

Samiran Chakrabarty of Standard Chartered Bank blames food inflation and fuel price inflation for WPI touching 5.79 percent. He does not see export competitiveness getting impacted because of this, as bulk of the inflation is coming from items that India does not export, like food, but this may impact foreign investor confidence.

Also Read: WPI inflation accelerates to 5.79% in July
According to him, the exchange rate depreciation needs to be examined more carefully to understand to what extent the commodity index actually declined over this period globally and maybe inflation in India is not picking up on that decline because of the depreciating rupee. Though, he says, given the sluggish growth nature of the economy - even on imported goods - the pricing power is pretty limited and that is probably why the pass-through is not yet complete.
If prices don’t come down in the next few months despite good monsoons, increased area under acreage and new crops coming in, then the inflation trajectory, going ahead, will be much higher.
According to Indranil Pan of Kotak Mahindra Bank, there is no chance of monetary easing by RBI post the high CPI and WPI numbers. According to him, food inflation may continue to stay on the higher side on a relative basis on the back of the Food Security Bill actually playing out.
He believes even the bond market should start to look at pricing the assets at a repo rate of 7.25 percent, which was the hunch belief because everybody was expecting the 10.25 percent measure of liquidity tightening to not last quite long.
He does not expect the 10.25 percent measures to go away immediately unless the currency dynamics stabilise and the chances of that happening are rather less. Below is the verbatim transcript of Samiran Chakrabarty and Indranil Pan's interview on CNBC-TV18 Q: You seemed to have smelt this trouble. July Wholesale Price Index (WPI) is at 5.79 percent. What does this mean? Any hopes of a rate cut after the rupee threat is over also goes away? Chakrabarty: Yes, this is a very difficult number for the policymakers to handle. This is now going to create a higher base for inflation and from there to bring down inflation back to 5 percent or below is now going to be even more challenging. I suspect that the food inflation part, particularly driven by vegetable prices, is going to be the primary driver of this move and also to some extent I think on the fuel price inflation there has been some increase because of diesel and petrol increases and some amount of exchange rate depreciation must have passed through the system by now. Q: Any comments on the internals that I read? Chakrabarty: It is quite clear that it is the vegetable and the cereal effect which is primarily dominating it. On exchange rate depreciation part we have to look at it slightly more carefully to see to what extent the commodity index actually declined over this period globally, but inflation in India is not picking up that decline because of the exchange rate depreciation, so that could be one issue, but it is very clear that given the sluggish growth nature of the economy even on imported goods the pricing power is pretty limited and that is why probably the pass-through is not yet complete.
On the trajectory part now the critical component will be with better monsoons, better acreage under production, would cereal prices come down in the months to come? Would vegetable prices with the new crop coming in come down in the next couple of months? If that is not the case then possibly we are looking at a much elevated inflation trajectory going forward. So this is our only hope that better monsoons will actually increase supplies and bring these prices down as we move forward.
_PAGEBREAK_ Q: Bond yield is at 8.55 percent. That is an 8 bps jump after the inflation number came in. Where are we headed? Do you want to buy bonds at this level? Pan: As I told you 8.50 percent level has been achieved much earlier than what we were anticipating. The inflation prints, both Consumer Price Index (CPI) and WPI, have just about taken off all chances of any easing bias on the monetary cycle. Therefore, gradually the bond markets should start looking at whether they should be pricing the assets at a repo rate of 7.25 percent which was the hunch belief because everybody was expecting that this 10.25 percent measure of liquidity tightening may not last quite long.
On one side that is lasting for a longer period than we anticipated and there could be actually chances for the Reserve Bank of India (RBI) to gradually turn around the monetary cycle if these are the inflation prints that are actually coming out.
In an attempt to contain the structural problems that we are facing in terms of the Current Account Deficit (CAD), it is but natural that we have to allow for relatively higher real interest rates on the savings to also have an implication for domestic demand for gold. So everything is playing together in terms of interest rates being sticky and on the higher side and also possibly rising. Q: What is the probability that you would assign to perhaps now the RBI considering a repo rate hike? Pan: We should not forget the dynamics change in the monetary cycle that maybe due in the sense that some of the other competing emerging market (EM) economies, especially Indonesia which faces more or less similar problems to that of India has been hiking rates. The way I would possibly be looking at it is what if they get a chance to move away from the 10.25 percent overnight rate. Whether they would want to fall directly down to 7.25 percent or they would want to buffer the system in terms a relatively higher interest rate push from that angle.
So there could be a thought process of the RBI to probably narrow the band with which we are operating at this point in time, but having said that I am not really expecting the 10.25 percent measures to go away immediately unless the currency dynamics stabilise and there is very little opportunity that I am seeing in terms of the currency dynamics stabilising immediately. Q: With this kind of a WPI rate would long only investors in India begin to worry? This is a turning of a trend which investors watch very closely. Secondly, what does this mean for export competitiveness? Currency depreciation helps to a point, but the internals for an Indian manufacturer are getting only worse. So how would the currencies react? Chakrabarty: On your first point about foreign investors, a higher inflation print is a negative for them and they are likely to think that this is another of the problem issues that is going to crop up again. On your second point about export competitiveness, I do not think current inflation print makes me any more nervous. Bulk of this inflation is coming from items which we do not export, like food.
The items which we will probably be exporting on the manufacturing side I do not see any real price pressures on those elements. So I am not sure that whether export competitiveness is going to be impacted because of this, but foreign investor confidence might be impacted. Q: What would your trajectory for WPI inflation be? Now you do not believe that the RBI's 5.5 percent or 6 percent by March looks plausible? Chakrabarty: The food element is extremely volatile. So as we are seeing monthly increases of 10-20 percent on vegetable prices, we could see monthly decrease of 10-20 percent also going forward and that can bring down the headline number substantially. So I am not absolutely pessimistic that this number cannot come down to 5-5.5 percent going forward. I think it is still a possibility. Pan: The pressures from the inflation side despite the fact that there is a weak pricing power would continue. I am actually not sure about what is the extent to which food prices will fall, because structurally we are into a problem whereby going forward as and when the Food Security Act actually plays out in a more significant way there could be problems in terms of the domestic demand-supply gap.
So structurally therefore the food inflation continues to be staying on the higher side on a relative basis for me and thereof the CPI inflation does not get a chance to come down and I think the RBI is clearly very sincerely looking at the CPI inflation much more today than the WPI inflation would be my bet.