Inflation set to rise again after 12 months: RBS

Sanjay Mathur, head of research and strategy, Non-Japan Asia, RBS, believes that inflation even after touching 6.3 % will not necessarily stay there, as there are no major structural fiscal policy changes.

He is expecting a print of 5.8 % of the GDP to cover the fiscal deficit for FY12 and the dollar to touch 48 in April.

Below is the edited transcript of Mathur’s interview with CNBC-TV18. Also watch the accompanying video.

Q: Tell us your comments about the inflation number that came in yesterday – it was good to see 6 after about 26 months but when you looked at the revision of the November number this looks less as an achievement?

A: Yes, I do think it was not that big an achievement. There are couple of things to be kept in mind. Firstly, it is a good development that inflation has finally gone sub 7%, which was the target for the RBI by March end. Also the core inflation is starting to come off although the month on month trend could have been better. It seems that the inflation as a sequential momentum is still showing a degree of stickiness.

Going forward with the kind of industrial output numbers we have, it is of little doubt that inflation will genuinely slowdown. Where does that leave us in terms of policy? I think March is still too early for the RBI to cut rates since it is coinciding with the budget being announced. However, I believe you will start to see a path of interest rate reduction build in from April.

Q: A lot of people have been saying that perhaps by mid-year they are expecting inflation to even touch 6.3%  but you have doubts whether inflation is going to genuinely slow from here. What kind of a trajectory do you think we could see perhaps in this year?

A: I do think that inflation will go to 6.3% and we are probably building in even softer numbers. Nevertheless, the point that is worrying us is whether this is a genuine correction to price pressures or is there so much of a base effect that is helping the inflation numbers come down. I think the jury is still out there, particularly because commodity prices have proven to be sticky internationally as well.
 
Q: If you looked at the 2 digit disaggregated numbers of the WPI, the biggest contributor in manufacturing index are chemicals and base metals and alloys and both of them went up by about 0.8 to 1% month on month. Those two elements didn’t really see relief which is the core of the core index in terms of inflation. In addition, it is a situation where global commodity prices are beginning to snake up, notably crude but not only crude. So why this confidence in inflation numbers coming down?

A: The confidence is really resting on the fact that base effects become very-very favourable as you go through the course of the year. To some extent I would say things like chemicals, will see a bit of a spurt because of the currency issue. Now that currency has stabilized; it hasn’t gone back to very comfortable levels but nevertheless the move of 54-55 has been corrected substantially. So there will be an exchange rate issue favourable effect as well.

Beyond that if the economy recovers in the second half which we think is going to be the case I don’t see how much of a correction we will see in inflation. We also do not know how the agricultural output will pan out for the year. I would not say that structurally we are moving towards a lower inflationary environment. I think that this is a correction. The odds are that inflation after the next 12 months not over the next 12 months would probably start to go up again. I don’t think that we have reached a point where we can comfortably say inflation has structurally come down largely because of the way fiscal policy is oriented.

Q: Can you give us an idea of how you are looking at the growth numbers starting with the one that we will get on February 29th?

A: Offhand, we are looking at 6.8% for FY12 and then we sort of continue on a flattish trajectory for the next two quarters and thereafter we close the year, that’s FY13 at north of 7.5%.

Q: With these estimates, what kind of an impact do you think this will have on the course of the monetary policy?  Also what kind of a pace are you expecting for the rate cuts itself?

A: What we are expecting is that we would start with possibly 50 bps. That’s the biggest of the lot. Thereafter we see subsequently 25-25-25 straight and then we probably will come to a halt on it.

Q: Nothing on March 15?

A: I don’t think so. We might probably see a 50 bps CRR cut. Another 50 bps to relieve the system of the liquidity deficit we see. However, I don’t think that the RBI is going to move until they have got a full grasp of what the budget is going to be like.

Q: As far as the fiscal deficit is concerned, the government has been trying very hard to bridge that gap and in all likelihood that does not look very possible now. How much do you think it is actually going to be overshot by now?

A: We are looking at a print of about 5.8% of GDP. So it’s quite an overshoot.

Q: What would be your practical expectation for FY13?

A: With the current growth momentum and the growth trajectory we maintain, it is very unlikely that we go below 5% next year.

Q: How do you see the rupee progress from now on? It has retraced more than 50% of the losses that it suffered since end July or early August. Where do we head from here say up until March and later on up until June?

A: I think when we spoke on this issue earlier I was a lot more downbeat on the rupee. One of the things that have surprised us is the scale of non-resident Indian deposits. We do not have numbers for it, but the feeling from most banks that we have spoken to is very good. On that basis we are looking for a level of around Rs 48 and then the rupee sort of moves sideways from thereon.

That Rs 48 could come as early as April or May. We could move that to March but let’s see how the uncertain Greek situation gets resolved. Now that is based on flows. Thereafter if you look, the RBI has lost or expanded a considerable amount of FX reserves. Thus, there will be an intervention to replenish these results. Hence we are expecting a flattish trajectory from thereon.