Govt needs to be praised for keeping extent of MSP increase subdued, says Sajjid Chinoy, Asia Economics, JPMorgan. While progress of monsoon will be critical, the government's move on MSP will help contain inflation, Chinoy told CNBC-TV18.
He, however, said the scope of a rate cut in the mid term is limited. "if growth picks up in the coming quarters, you would expect core inflation to pick up," he said. He expects core inflation to inch up in the coming months on the back of firming growth and added a quick offloading of stocks of rice and wheat will help contain food inflation.
Below is the transcript of Sajjid Chinoy's interview with Nigel D'Souza and Ekta Batra on CNBC-TV18. Ekta: The minimum support price (MSP) hike — you have had some time to dwell over it — and we are seeing some amount of progress coming in on the monsoon as well. What is your sense, does it possibly give a set up of the Reserve Bank of India (RBI) to possibly cut rates more than what was anticipated? A: I wouldn’t go that far but let us start by giving the government enormous credit for what happened yesterday. There is a lot of rural stress, there were worries, Met\\'s official forecast is still for a drought and under these circumstances, it would have been tempting and there must have been a lot of pressure to raise MSPs sharply. However, the fact that the government resisted is a very good sign that even under pressure they will continue with macroeconomic orthodoxy, which will please the Central Bank enormously. Two things to note from the MSPs -- one is that the main crop that is procured which is paddy those prices only went up 3.7 percent almost the same as last year. So that will not add any fresh inflationary impulse to consumer price index (CPI) inflation. The second is while keeping the aggregate price level contained, there was a relative price implication within that. Our pulse production fell badly last year, we import pulses so to try and incentivise more production of pulses, the MSP for pulses went up proportionately almost 6 percent. That is understandable, that is more of a relative price differential even as the aggregate price level is seek to be contained by the government.
Nigel: Is there any change in your inflation forecast going ahead after we got this MSP price hike, that was more or less very much in line with what we were estimating and nothing untoward came out of there, so has it changed your inflation forecast a tad bit? A: It hasn't because we were expecting the government to keep MSP prices contained. I think there are two parts to the inflation forecast that we need to focus on. If you strip away food and oil prices, underlying core inflation has firmed in the last three-four months stripping out food and fuel core inflations running around 5.6 percent in the month of May. So, policymakers will keep a close eye on that and the sense is we are finally getting signs that growth maybe picking up in the last three-four weeks which is very good news. But if growth picks up in the coming quarters, you would expect there to be some pressure for core inflation to pick up. Which is why food inflation becomesso crucial because the difference between inflation printing close to 6 percent mark in January, which is the RBI's forecast, and a low 5 percent, which may create the conditions for one more rate cut, will come down squarely to food.
So far the news has been good, we have had two good data points not only that MSPs have not gone up, the monsoon is defied all predictions so far. So I think what will matter now is how the monsoon progresses and what the government's response is. I think the faster and quicker they can respond by offloading stocks of rice and wheat, the faster and quicker we can import pulses and oil seeds, the more food inflation will be contained. That is the elephant in the room. How do food prices evolve, even as we expect core inflation to inch up in the coming months on the back of firming growth. Ekta: What is your expectation for the CPI in August do you expect it to touch that 4 percent mark and where would food inflation then be? A: We do expect it to touch 4 percent and I think a lot depends on food. It is even possible it may go a tad below 4 percent if the current food price pressures pan out. You have seen in the first half of June yes, pulses keep going up, vegetables have gone up a little bit, cereals just a tad but in general food price pressures remain contained. However, I don\\'t think the RBI will focus too much on what the number is in July and August; those are clearly base effects at play. I think the first number that will matter is the September CPI and what happens to where CPI is after the monsoon and after the base effects have normalised. He says chances of a rate cut by RBI looks limited now, but if inflation falls below the mid term Ekta: What is your base case scenario from the RBI and what is your best-case scenario given the current circumstances also the fact that the Fed will possibly limit its rate hike now? A: The base case is that they stay on hold and that is under the assumption that we have a normal monsoon but growth picks up over the next quarters and have a CPI forecast of about 5.8 percent for January holds. If that is the case, I think the RBI will not move any further. Remember they are guided by the medium-term inflation forecast which is 4 percent so even if you are in the mid-5 you are significantly above the medium-term forecast and they have said explicitly that monetary policy will be conditioned to that 4 percent. Best case scenario is perhaps one more rate cut if you get inflation substantially below their forecast. So inflation is on track to printing at 5 percent at the end of this year, a good 100 basis points (bps) below what the RBI thinks and the fact that the Fed has moved out so if the rupee is stable and is providing some disinflationary impulses then we will consider one more rate cut something in Q4 of this year. That is the best case scenario, we don't expect a bigger rate easing cycle because the 4 percent number is what is going to drive our policymakers over the next year or so.
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