India’s inflation in October surged above 9% for the 11th month now, trimming down RBI’s scope to slash the interest rates and pause the cycle. At a time when the market was hopeful to see a pause in rate hike cycle in order to shield the economy from global upheaval, the inflation numbers have left an ambiguous taste.
In an interview to CNBC-TV18, Sajjid Chinoy of JP Morgan, A Prasanna, chief economist at I-SEC PD and Arun Kaul, chairman at UCO Bank discuss the repercussions of the inflation data, released today.
Below is an edited transcript of the discussion on CNBC-TV18. Also watch the accompanying video.
Q: October inflation at 9.73% is a little worse than the estimates of 9.67%, does this look extremely troublesome?
Chinoy: It does look troublesome and we already know the other ingredients. We have the numbers for primary inflation, food, non food, minerals and fuel. These numbers mean that unless processed food inflation has surged the month on month seasonal adjusted number for non food manufacturing which is core inflation should be about 0.5% which is higher than last month and is a run rate of about 6% on an annualized basis. So still there is no evidence that the pricing power across the board is coming down based on this one number and that is the troubling part despite a slowing economy.
Q: What do you do with an inflation number like this — do you see the possibility of interest rates coming down in the system?
Kaul: Inflation numbers are more than what we expected. Clearly, we have seen the impact of the fuel price hike. We are a bit concerned about the manufacturing inflation because that should gradually come down but is not. The base is moving up, we have to wait for more time and see if inflation does come down to levels where RBI expects to see it by March.
Q: Is this all ultimately not very material given that the Reserve Bank would still expect the base to kick in by December. Do you think that there is nothing in this number to make them change their guidance which is that they are on hold in December?
Chinoy: In the last policy review, RBI did expect that October and also November numbers would be very high but the worry is the base effect is very large and is also fleeting.
The problem is if the momentum does not slow down, in the month of April we will see headline and manufacturing inflation crawl back up, which is a concern that we have to be focused on. The exact same phenomenon happened last year. The December inflation numbers came down because of base effect and from February they began to surge again. Hence, I think we should be very wary of these base effects.
Q: What is your sense, will it be extremely awkward for the RBI now to even contemplate an Open Market Operations (OMO)?
Prasanna: There was a trend where the month on month increases in manufacturing was slowing down. So, this month, we don’t know whether something like cement was just a one off or its just more price increases are happening. If that’s the case then going ahead manufacturing they can go up a bit more.
Q: Your hunch is therefore that this could be a one-off, considering that we have signs of slowdown across all industries?
Prasanna: There is the global uncertainty on one hand and on other hand domestically there is a slowdown, although the magnitude of slowdown is difficult to estimate. Hence, to put these two together it is not clear that manufacturing prices will go up month after month.
Q: Do you think we are likely to see an OMO, perhaps in the month of January once the base effect kicks in and inflation does taper off?
Prasanna: I think the commission on OMO is also linked to the liquidity situation. I think RBI for whatever reason kind of promised market that they will keep liquidity effect with in 1% of NDTL and already they have extended that level and going into the December advance tax the deficit will go up probably as much as 2% of NDTL. So, that will become the time as far as liquid projection is concerned. Hence we’ll see OMO sooner than January, probably by the end of this month.
Q: Do you expect the Reserve Bank to announce OMO as early as this week and maybe even this month?
Kaul: I still hope that inflation would come down as we go forward. Both because of base effect and I do expect manufacturing inflation to slow down because global commodity prices should start coming down, except oil all other price have already started coming down.
The objective of OMO is not only to induct liquidity but also to give signal to the market. We have noticed off late that the G-Sec’s have substantially gone up. The new 10 paper which came at 8.79% the yield has gone to 8.94%. 7.80% is a very popular paper last year, the yield has gone to 9.05%, yields have has really gone up.
If OMO comes it will give a clear signal to the market that RBI is not only inducting liquidity, RBI is also indicating that the yields need not be as high as they are right now. At a time when RBI is of the view that we are close to peaking out on inflation and inflation could come down to more comfortable levels by March, panic in the market is what we cannot afford.
Q: What is your hunch? Do you think that it kind of caps off at 9%?
Kaul: If I look at the wholesale price index, the latest figures at 156.80 remains constant up to March, the inflation will come down to 4.88% over the base effect. Given the fact that some increase will take place, I still have a feeling that the March inflation could come down to reasonable levels around 7-7.5% or so. Under those conditions there could be a case for yields to come down, yields may not remain at these elevated levels for too longer period.
Q: What do you think will be the RBI’s action in December? What do you think the RBI is likely to do after the December policy meeting?
Chinoy: If you pay closer attention on the IIP, the headline number was less than 2% but consumer durables which are suppose to be the most interest rate sensitive’s have actually reaccelerated in the IIP for the last three months. So, it is the segment which will be affected most by the rate hikes. However, high inflation is compressing purchasing power have actually fallen off six of the last 7 months, so in a sense inflation is hurting consumption and purchasing power almost more than rate hikes are affecting consumer durables.
However, if you take the RBI guidance, at face value the guidance is very clear, their projection for March is 7%. They have said that inflation asymptotes to that level by March then the need for more rate hikes may not be warranted.
The base effects are so large that even if current momentum persists the year on year headline rate is going to come down to 7% perhaps even lower and that might warrant a pause all the way until March. My concern is if the momentum hasn’t slowed down until now then come April-May-June, this inflation can kick back up again and that is a concern.