CPI number key for RBI in deciding policy move: Care Ratings

Despite a good kharif harvest on the back of good monsoons, Madan Sabnavis, Chief Economist, Care Ratings, says the Consumer Price Index (CPI) inflation is still a cause for concern. It remains higher than the 4 percent target set by the Reserve Bank of India and has not kept pace with the agricultural output. The RBI will be focussing on the CPI number before considering easing rates in the October Monetary Policy. The government has imposed an export ban and set a stock limit to be maintained by sugar mills. Sabnavis says government is not expected to ease these measures very soon due to the volitility of the commodity.Below is the verbatim transcript of Madan Sabnavis' interview to Manisha Gupta on CNBC-TV18. Q: What’s the initial reaction to the numbers that the government has come out in sense of production estimates? A: These numbers are very much on expected lines, because right from the time the sowing season started, we have seen that the acreage has been higher than what it has been last year, especially for the food items as well as oil seeds, what we are seeing now is more a case of manifestation of all these expectations that we had earlier and definitely it is very good for us, because our entire growth story for the year has been built upon the very good agriculture or rather good kharif harvest, which is what going to happen this year. Q: Also, what your sense going ahead now because the numbers are on the positive side, the monsoon is good as well so do you see this being taken into account on 4 October, when there is a RBI monetary policy? A: Looking at the RBI policy, they will be looking more at the CPI inflation number, which has not actually kept pace with this kind of expectations which we had in terms of agricultural output and while the inflation number, the CPI inflation number has come to 5 percent which is closer to what the RBI has in mind of 4 percent, which was what they have targeted. One should remember that it has been also due to a statistical base effect, which has brought the number down and we are expecting that around December-January it regain the kind of spike, so my sense is that RBI will probably pause and one of the reason which they will gave will also be because of the FCNR deposit outflow, where there really could be some kind of turbulence in the forex market though again RBI has stated that it has been provided for, but keeping these factors in mind, the RBI will probably just pause for a couple of more numbers to come on the CPI before it take any policy action. Q: The government has been quite concerned as well with the kind of rise that we have seen in many of these commodities, whether its sugar or whether it pulses and the kind of run up that we saw in many of those vegetables as well. With these kind of numbers and the kind of measures government has come out with like stock limit and export bans etc. Do you see all of that easing or would the government takes it own time and let this settle down, see better numbers than perhaps react. A: Sometime like sugar they will definitely take it some time, because this has been one of the more volatile commodities where we have seen that the prices have gone up sharply because we have low production last year, low production expected this year too. The government will probably still be a bit cautious when it comes to easing any of these measure that it had placed for sugar, but otherwise it will be a generally in a mood to relax conditions for commodity trading. Q: We are also looking at the festive season demand coming in and that perhaps will keep the prices on the higher side, but on the other side when you talked about the future market as well there has been various comments from chief economic advisors (CEA) on how they are looking at more instruments and further development the way the agri commodities are traded on the futures platform, what your sense on that with market expecting options to come and with government taking more interest here, perhaps to change it, perhaps to modify it. How does that whole scenario look to you? A: I would be a bit more moderate when it comes to bringing in more instruments, because today if you ask us how many farmers are participating on the futures exchanges it would be minimal. They will definitely gain which they will have in terms of superior price information, which helps them to take certain decisions, but in terms of operating on exchanges is very much limited. Now when you are talking of things like option they are more complicated instruments something which even the common man will not understand, so going in for options right now may probably good from the point of trading, but in terms of passing home the benefits to the farmers that would be very much limited. When we are talking in terms of having options on futures, so it is not a comparable instrument to say the MSP is saying that you have the option to buy or sell, but it is going to be on a future, so if I don’t understand futures getting in an options for me may not really be the right thing at this point of time.