CPI to stay below RBI’s 6% Jan 2016 target: StanC


The rise in the consumer price index (CPI), which came in at 5.6 percent in December, was largely driven by a sharp rise in pulses prices, which will likely remain high for a while, says Anubhuti Sahay, Economist at Standard Chartered.

Still, she says there is no worry on the overall inflation number: she expects CPI in January 2016 to stay below RBI’s target of 6 percent, and in January 2017, below the 5 percent target.

Immediately, the RBI will likely do nothing at its February policy meeting, in light of global uncertainties and the looming Budget, she told CNBC-TV18 in an interview.

On the other data point that was released yesterday, Sahay said analysts need to look past the shocker of -3.2 percent IIP in November, adding that such data tend to get skewed during festive seasons (Diwali occurred in November last year).

“So I would not get very worried about the data,” she said.

Below is the verbatim transcript of Anubhuti Sahay’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: I want to ask you about the inflation number, 5.6 percent in December. We have seen spike up in food inflation especially in the rate of the upmove in pulses, what is the expectation hereon, do you expect more pressure?

A: If you look at the overall consumer price index (CPI) number as you correctly pointed out, it was driven by a higher prices. In fact, if you take out the pressure or the additional pressure which has been caused by pulse prices, CPI could have been as low as 4.8 percent to 5 percent. Going forward, I think given the supply-demand mismatch, which is there in the pulse rate will have to live with higher food inflation for the coming month but going forward as the fresh harvest comes in and once we incorporate normal monsoons for the year of 2016, we would expect pulse prices as well as food inflation to come lower.

Latha: How are you drawing the inflation trajectory, what is the average for Q1 of January-March and how does it progress thereon?

A: For Q1 of January-March, let me first answer on January 2016 number itself, the key question after the 5.6 print, which we got yesterday is whether RBI will be able to meet 6 percent CPI target, we clearly see no threat to that number. We do see it undershooting by at least 50 bps. For the January to March quarter as a whole, we would expect it to average at closer to 5.5 percent given that we don’t expect pulse prices to come off very significantly. For the rest of 2016 or for that matter, FY17, we expect CPI to average at 5.3 percent. We do expect the January 2017 5 percent CPI target to be met.

Sonia: What about your expectation from the RBI policy in the month of February?

A: For the month of February, we expect the RBI to stay on hold. There is a lot of uncertainty as far as the global environment is concerned. Even if you look at the CPI number that doesn’t sound the right note as far as a positive action on the rates are concerned. More importantly, I think at this particular moment, RBI would like to get lot more clarity on the Budget of FY17. So once the Budget presentation happens by February end, we would expect RBI to go ahead and cut rates by 25 bps in its April policy meeting assuming they are not looking for an intermitting action.

Latha: Finally does the index of industrial production (IIP) number change your outlook on growth at all?

A: Not at all. Lot of exports have already highlighted, these numbers needs to be read in conjunction with the October number. Usually whenever there is a sharp rise in IIP due to festival related months, we do see a sharp reduction and most of the time, we as analysts are not able to quantify it properly. Even if you go back to October 2014 when we saw the last negative number that came after the festival demand disappear. So I would read this number cautiously.

Secondly, if you look at the capital good segment especially the cables and wires, it on its own chipped off 240 bps from the headline IIP and we all know cables and wires have always had a very erratic impact on headline IIT services. So again I will e cautious on that particular fund.

So I would rather read out three months together in order to get an idea about the IIP — probably December might still remain distort because that was the month when Chennai floods happened but the January number should bring us back to more normal levels and should reflect the overall economic activity, which we think has not deteriorated so significantly as suggested by the November IIP print.