 "RBI does not have clear inflation objective: Richard Iley")
Richard Iley, chief economist, (Asia, ex-Japan) at BNP Paribas, talks to Neelasri Barman on inflation and related issues ahead of the Reserve Bank’s annual review of monetary policy. Edited excerpts:
We have seen the January wholesale price index (WPI) numbers were revised upward, though March inflation figures show a downward trend. Where is the WPI headed?
The revision of the January numbers was a bit of a surprise. But, moving forward, the Reserve Bank of India (RBI) is expecting a deceleration in the numbers. The headline WPI for 2013-14 will be a bit below six per cent. Core inflation will fall even more rapidly. By the end of the financial year, core inflation will fall to below three per cent, the lowest since the global financial crisis.
What will be RBI’s annual monetary policy guidance?
The CPI (consumer price index) continues to be in double-digits. How big is that a concern for RBI?
It is a concern. RBI does not have a clear inflation objective. It is trying to address a pretty wide menu of options in inflation. The CPI is a better measure for the consumer. The sticky nature of CPI largely reflects two things. The high food inflation is putting a lot of pressure on the CPI and food inflation is also stubborn. A more elevated CPI is an impediment to aggressive rate cuts.
How much of repo rate cuts and cuts in Cash Reserve Ratio (CRR) are you expecting?
Our base case is that we will get a rate cut this week of 25 basis points. But I suspect the policy statement will remain relatively cautious about future rate cuts. I think after that, we will see one more rate cut. On CRR, I think liquidity is tight but not getting any worse. CRR is at a historically low level and RBI will be reluctant to cut it further. We expect CRR to remain unchanged.
Do you expect the current account deficit (CAD) to reduce, on the back of the recent fall in commodity prices?
I think the CAD will continue to be wide. The fall in prices resulted in higher gold demand. Despite relative sluggish growth, the demand for crude (oil) is also rising. Maybe the CAD will improve in the coming years. As a percentage of gross domestic product (GDP), it might fall because the GDP cake is becoming bigger. For 2012-13, I expect it to be 5.1 per cent of GDP and for the current financial year, I expect it to be four per cent. The key point is that the overall external financing requirement is still going to be quite high.
Where is the rupee headed, in a scenario when CAD is expected to come down?
On the back of rate cuts, policy reforms from the government and improvement in the global environment will result in the rupee making smooth gains against the dollar. Our end-December target for the rupee against the dollar is 53.
How realistic is the fiscal deficit target of 4.8 per cent of GDP?
In 2013-13, we might see disappointments on tax collections and government subsidies. That will raise the risk, due to which we feel it might breach the 4.8 per cent target. The government is likely to face the awkward choice of cuts to spending close to a general election. The fiscal deficit for 2013-14 will be five per cent of GDP.
Recently, the International Monetary Fund (IMF) revised India’s growth projection for 2013 to 5.7 per cent from the earlier 5.9 per cent. What is your outlook and what factors might help growth?
We do a GDP forecast keeping the year in mind. For 2012-13, we are expecting 4.9 per cent and for the current one, a growth of six per cent.
We’re now seeing firmer growth numbers for the Index of Industrial Production. That gives a positive momentum. The main driver of growth is from capital goods. This gives an idea that we might see the beginning of capex spending. Besides, net exports might grow, too.
We have seen the January wholesale price index (WPI) numbers were revised upward, though March inflation figures show a downward trend. Where is the WPI headed?
The revision of the January numbers was a bit of a surprise. But, moving forward, the Reserve Bank of India (RBI) is expecting a deceleration in the numbers. The headline WPI for 2013-14 will be a bit below six per cent. Core inflation will fall even more rapidly. By the end of the financial year, core inflation will fall to below three per cent, the lowest since the global financial crisis.
What will be RBI’s annual monetary policy guidance?
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I think they will be hawkish. At the same time, they will highlight the fact that there have been constantly low WPI numbers.
The CPI (consumer price index) continues to be in double-digits. How big is that a concern for RBI?
It is a concern. RBI does not have a clear inflation objective. It is trying to address a pretty wide menu of options in inflation. The CPI is a better measure for the consumer. The sticky nature of CPI largely reflects two things. The high food inflation is putting a lot of pressure on the CPI and food inflation is also stubborn. A more elevated CPI is an impediment to aggressive rate cuts.
How much of repo rate cuts and cuts in Cash Reserve Ratio (CRR) are you expecting?
Our base case is that we will get a rate cut this week of 25 basis points. But I suspect the policy statement will remain relatively cautious about future rate cuts. I think after that, we will see one more rate cut. On CRR, I think liquidity is tight but not getting any worse. CRR is at a historically low level and RBI will be reluctant to cut it further. We expect CRR to remain unchanged.
Do you expect the current account deficit (CAD) to reduce, on the back of the recent fall in commodity prices?
I think the CAD will continue to be wide. The fall in prices resulted in higher gold demand. Despite relative sluggish growth, the demand for crude (oil) is also rising. Maybe the CAD will improve in the coming years. As a percentage of gross domestic product (GDP), it might fall because the GDP cake is becoming bigger. For 2012-13, I expect it to be 5.1 per cent of GDP and for the current financial year, I expect it to be four per cent. The key point is that the overall external financing requirement is still going to be quite high.
Where is the rupee headed, in a scenario when CAD is expected to come down?
On the back of rate cuts, policy reforms from the government and improvement in the global environment will result in the rupee making smooth gains against the dollar. Our end-December target for the rupee against the dollar is 53.
How realistic is the fiscal deficit target of 4.8 per cent of GDP?
In 2013-13, we might see disappointments on tax collections and government subsidies. That will raise the risk, due to which we feel it might breach the 4.8 per cent target. The government is likely to face the awkward choice of cuts to spending close to a general election. The fiscal deficit for 2013-14 will be five per cent of GDP.
Recently, the International Monetary Fund (IMF) revised India’s growth projection for 2013 to 5.7 per cent from the earlier 5.9 per cent. What is your outlook and what factors might help growth?
We do a GDP forecast keeping the year in mind. For 2012-13, we are expecting 4.9 per cent and for the current one, a growth of six per cent.
We’re now seeing firmer growth numbers for the Index of Industrial Production. That gives a positive momentum. The main driver of growth is from capital goods. This gives an idea that we might see the beginning of capex spending. Besides, net exports might grow, too.