Expect IIP to improve, fall in inflation: Credit Suisse

Robert Prior-Wandesforde, economist, India and Southeast Asia, Credit Suisse explains to CNBC-TV18 that he expects the IIP data to reveal an upside surprise and estimates that Consumer Price Inflation will fall and that will induce the RBI to cut rates in January. 

Below is an edited transcript of the analysis on CNBC-TV18

Q: What is your expectation from the IIP data today?

A: We are looking for a slight upside surprise, not a huge amount - just about 3 percent. This really reflects, I think above all else, the data for the eight core industries which picked up quite smartly, to just over 5 percent. The correlation between those eight core industries and the overall industrial production is something like 0.8. So I would be surprised if we did not see at least a modest improvement.

Q: Is your confidence growing that maybe industrial activity has bottomed out?

A: Yes, I think it has. I think one thing that we should pay close attention to, is the capital goods data. I think this may well turn positive for the first time in quite a few months and indeed, the overall data and the capital goods data perhaps is turning around. We sieve through the data and look at some of the sequential changes to get an idea of recent momentum which clearly has been improving for a few months now.

So I suspect the worst is over not just for industrial production, but for the GDP as well. I think it probably bottomed in the March quarter of the previous fiscal year. So things are getting better, but obviously very slowly. The fundamentals are still not great. It is still nowhere near strong enough to generate some sort of bell-shaped recovery. But something is better than nothing, I guess.

Q: Do you expect this trend to also show in the GDP data over the next couple of quarters which will not be great but a slight improvement on the margin?

A: Yes, I think so. Certainly agriculture was a wild card, but if you set aside agriculture, I think there should be an ongoing improvement. There are two or three factors that leave me little bit more optimistic than most about the growth prospects. One, I do think the reforms, although they are not going to revolutionise the economy overnight, will have probably provided a short-term lift to confidence and may provide a similar boost to capex at the margin as well.

On interest rates, I suspect that some of the biggest lagged negative effects of interest rates are now waning. So though interest rates have not become a positive, they are becoming less of a negative and of course, the weakness with exchange rate should be helping net trade as well. So these are the factors there I think that we can rely onto get at least some modest improvement in activity.

Q: The Consumer Price Inflation (CPI) data is to be released today. What are your expectations?

A: I think there might be a little drop. The index is influenced by food which has a weight of something like 40-45 percent. Food prices in the very near-term could move down a little bit. So I suspect we will see a small drop, but it is still going to be uncomfortably high. I would be very surprised if it did not start with a 9 percent in this particular release. So WPI inflation will be close to 8 percent and the CPI will be close to 10 percent.

This, of course, is a break on the RBI's activity as far as interest rate cuts are concerned. Having said that, I do not think we need WPI inflation to come down much from here to get a January rate-reduction. I think we will get a January rate-reduction. It will be seen as a belated pat on the back for the government’s various reforms.