Fresh price pressures on Nov CPI likely

It is a double whammy for the Indian economy. The Index of Industrial Production (IIP) for September has slumped to a four-month low of 3.6 per cent, while the Consumer Price Index (CPI) for October has risen to 5 per cent. Does this effectively rule out any further rate cuts in the foreseeable future? Bloomberg TV India discusses this and other concerns around the economy with Anubhuti Sahay, economist at Standard Chartered Bank.

I want to start with how you are reading the figures of CPI as well as the IIP…

If you talk about the IIP number, which is at 3.6 per cent, we were not really disappointed. In fact, this was pretty much in line with our expectations. We were looking at 3.3 per cent and it was a tad better.

Second, if you look at the monthly IIP numbers for the first half of FY16, it is the September number which was pretty much in that range. Monthly IIP numbers have been in the range of 2.5 to 2.4 per cent and therefore the way I would put this is that the September IIP was in line with the trend observed in the first half of FY16.

Probably, the August number at 6.4 per cent was an aberration and even if you look at most of the consumption indicators, the proxy growth indicators — which capture the consumption trend, investment number, exports for that matter and even the core sector activity — they all paint a pretty sluggish recovery story. So I would say the IIP number has perfectly captured what is happening on the ground. I am not disappointed with the IIP number, but concerned about the overall sluggish pace of recovery in India.

Now, coming to the CPI number, which is at 5 per cent, once again this is pretty much in line with our expectation. But this number, though it is pretty high — if you compare it to the previous month — is primarily driven by two components. One is pulses, which grew at an extremely high rate of 42 per cent and onion price, which is still growing at a whopping 72 per cent. Once you take these two components out of CPI then probably the CPI was lower than 4.5 per cent. It is a high number but primarily driven by just two or three food components and that also very well gets captured by the core CPI.

You are talking about how the onion and pulse prices have contributed to the CPI. Do you expect that there will be more pressure going forward on the CPI front?

Look at the retail price data for the first 10 days. It seems onion prices are actually coming off. So probably we can see some positive impact coming soon in November but pulse prices have actually kept on moving higher.

On top of it, in the last one week, there have been a few other fresh price pressures and they are likely to be exerted on the November CPI at least. For instance, there was an excise tax hike on petrol and diesel. There was also cess imposition on services. Put together, all are likely to put an upward pressure.

In November, we do expect the CPI to move again and go higher to 5.25 or 5.5 kind of a range on the upside but once the pulse prices are brought under control, on which the government is working really hard, we should see CPI again settling down at a much more reasonable level. We really don’t see any challenge to the RBI’s target of 5.8 per cent by January 2016.

How would the data we have at this point of time impact or influence the RBI?

If you look at the RBI Monetary Policy, I don’t think at this moment — especially if you talk about the December policy meeting — these two data points will make significant difference to the RBI’s action.

What will dominate in this RBI policy meeting is the Fed rate hike. I mean that is the most important factor. The global events are likely to be more dominating than the domestic factors. We really do not foresee any further rate cuts from the RBI, either in the rest of 2015 or for that matter in 2016.

But let me emphasise that in 2016 there can be room for further rate cuts from the RBI. We do see that risk to our call but it will very crucially depend upon how the global event pans out.

In case we see a negative shock on the global growth front, even if the CPI remains at 5-5.5 per cent, we will still see the RBI cutting rates and that was pretty much apparent if you focus on the RBI policy statement which Governor Raghuram Rajan delivered in the previous policy meeting.

So global growth and domestic growth have taken at this particular moment and any negative shock on global growth front can push the RBI towards cutting rates much more than what the market is looking at.

COMMENT NOW