Inflation at 7.41%; experts certain on CRR hike
Inflation stands at 7.41% versus 7% for the week ended March 29 . The market had estimated it at 7%.
The iron and steel inflation has gone up 5.6%. The inflation is highest since November 8, 2004. The manufacturing inflation is up 0.9%, while the inflation for all commodities is up 0.5%.Almost all the experts CNBC-TV18 spoke to, agreed that a CRR hike is on the anvils; say a 50 bps hike.
Ashok Desai, Columnist of The Telegraph expects inflation to go down in April and May and surge again after a couple of months. He said market has now factored in high inflation scenario. Year-on-year, inflation will go down below 7% for at least next two weeks, he said.
Sucheta Mehta of Standard Chartered Bank said that the inflation was higher at 7.41% than her original estimate of 7.26%. According to Mehta, the fiscal measures taken are yet to have an impact and will continue to have an effect during the weeks to come. The fiscal measures are yet to show result on the WPI ( whole sales price index).She expects the inflation to remain at an
.Mahta predicts a 50 bps CRR hike to control liquidity, and an appreciation of currency in the near-term.
Tushar Poddar, Goldman Sachs feels that the inflation number is expected to remain elevated at around an average of 6.5% for next 6-months. He expects repo rate hike of 50 bps in the policy meeting. He does not rule out CRR hike this month as well as an RBI announcement even before the scheduled meeting at the end of this month. According to Poddar, the inflation is driven by demand pressure and only by supply side.
Sharmila Whelan, Senior Economist of CLSA expects inflation to remain high. She feels that the RBI may raise CRR and the reverse repo rates. CLSA sees a 7.7% GDP growth in India; which is revised from its earlier forecast of 8.3%.
Rajiv Anand of Standard Chartered Mutual Fund expects the 10-year yield to go to 8.25%. He expects rupee to appreciate and open market operation from RBI.
Sanjay Sinha, CIO, SBI Mutual Funds feels that the market has now factored in high inflation scenario. He feels that India would have to live with higher inflation numbers for sometime now. India is in a phase of higher level of inflation and the monetary measures taken may also not have a significant effect. India may see another quarter of higher zone of inflation, he added. Sinha said that the FMCG sector has been the least affected and he expects this sector to outperform.
Meanwhile, Newswire18 reports that according to Lehman Brothers there is a risk of a 50 bps CRR hike to curb excess liquidity. They expect the inflation to be firmly above the RBI target till December.
JP Morgan is of the view that RBI is likely to tighten the credit policy by hike in CRR by 50 bps before or at the policy. Risk of inflation is seen ranging above 7% for next couple of weeks.
Possibility of CRR hike:
Mehta expects the authorities to use almost all possible tools to climb down inflation more fiscal measures. “We might also see a 50-basis points hike in Cash Reserve Ratio (CRR) to ensure that liquidity is under control and we do see at least in the near-term some appreciation of the currency,” Mehta said.
Mehta added, "We are not expecting a change in the Repo and the Reverse Repo at this point in time. Largely because if we look at the growth picture, we are seeing some visible signs of slowdown on the consumption side. So a trade indeed needs to be worked out between growth and inflation. So while liquidity management would be a better option, interest rate hikes at this point in time perhaps may not be the best possible option. Credit growth is already decelerating and demand side pressures are not there. So we do expect more liquidity management relative to interest rate hike and as one of the previous speakers did mention, that there are more inflationary pressures that might be building up, given the fiscal stimulus that was provided in the previous Budget. And we need to watch out for the impact of those in the coming months, which indeed indicates that inflation would remain high despite the kind of measures that might be adopted.”
Drabu said, “I would think that they would still want look at another week or so then some pre-empting credit policy perhaps the world is not going to come down on you in two weeks time. We are looking at credit policy at the end of the month. I think the RBI would respect that and bring in measures at that point of time and I think there would be whole set of measures not just CRR hike or incremental; incremental CRR hike perhaps is more relevant at this point of time. But some other measures like increasing the risk weightage to slowdown certain sectoral growth and all that would come in. But I don’t know how far that will be useful though.”
How will markets react?
According to Sinha, the market has recalibrated to factor in that we will have to live through a scenario on a period in which the disclosed inflation numbers will be higher than what we have been living with for most parts of 2007 and the Q1 of 2008. “Going forward I think the inflation numbers, which get announced, every Friday may not be the only thing, which will have impact on the market. It has a back-to-back implication in the sense that these inflation numbers are high because the three components, which make up the Wholesale Price Index (WPI) the primary, fuel and the manufacturing components those numbers are higher and that’s why these inflation numbers are high,” he said.
However, Sinha added, “These all translate into a scenario that the margins of the companies in FY09 might get impacted negatively. We will get to see first sight of that when the Q4 results get announced in few days from now. If the impact is going to be fairly severe, I think going forward for the rest of the quarters the impact would also be therefore be equally negative. Therefore at the end of the earnings season we will probably have to revisit as to what are the earnings estimate for FY09 and see as to where the stock prices are in relation to those revised earnings estimates. Then take a view as to how the markets are going to travel from there.”
On commodities and WPI nos:
Drabu does not expect the statistical effect through June because by then, whatever monetary policy measures would have been taken, they would try and have an impact on the level of inflation. “The point is, should you be so concerned about a provisional WPI number because at the end of the day, this is a week on week number; the coverage is very low, it’s subject to revision, it is just an indicative number; it’s not the real threshold or real rate of inflation in a sense like a structurative inflation; it is purely a provisional WPI number. There are huge problems with WPI coverage and we have gone into a different mode of calculating as well as the basket of commodity. Broadly, we are in a phase of higher level of inflation - this will continue for some time, monetary measures taken would not have an immediate effect because this is my belief that it is not an inflation lead by monetary mismanagement; I think its an issue of public policy. So even if monetary measures are taken towards the end of credit policy, they are not going to have a serious impact and also a short-term impact. Monetary policy does not work like that. So we are looking at another quarter of high levels of inflation.”
Mehta said, “ What we have seen on the ground is that steel prices have risen more sharply than what is reflected in the Wholesale Price Index (WPI) that is the first reason. So we are seeing those numbers getting calculated in the WPI. The second important factor is that the fiscal measures that were taken in the past two weeks are yet to show result on WPI reading and this could begin to come in subsequent weeks. I think the picture going forward in the coming weeks is mixed, one is obviously the fiscal measures that have been taken to climb down inflation but the other measures, as I have pointed out is steel prices are higher on the ground relative to what is reflecting in WPI. Secondly ATF prices have been raised to about 12-14% those are yet to filter in the numbers and cement prices. So we expect inflation to remain high in the coming weeks, on an average for FY08-09 we expect inflation at about 6.5%.”
Desai said, “The commodity price figure gets reported and embodied into the WPI quite a few weeks later. So you get unexpected changes in the WPI and it’s quite possible that some of those changes have been reflected in the latest figure. But we are focusing too much on inflation and not thinking about the real economy; the real economy is sinking, the government is very aware of it, machinery production is falling, chemical production is more or less stagnant and the government is very much aware of it and it is trying to refract the economy, it has been trying to increase the purchasing power, it has reduced value added tax, its going to add an enormous amount to government salaries, all these are inflationary factors which will feed into inflation in the next few months. So I expect inflation to grow up further because of these real factors.”
Drabu added, "The issue is that what are the policy options available to the government, very few, particularly after you have played your fiscal policy out in different ways, whether its taxation, whether its expansion restructuring or whether its debt relief to farmers, even that is somewhere contributed to inflation expectations, it has a huge impact on net disposable incomes, so you would tend to see physical controls getting back some way or the other, looking at specific commodities and as Ashok said, we cant do very much with Iron and Steel but still, you would have morals per share and you would probably have some more majors coming in which would address the short term issue but there again its not something that would impact the long term trend of inflation which is what you are really addressing, whether that is today its 7.4 is not the issue, the real issue is that we are on a trajectory of a high inflation and now do you get that down, short term measures would be expected in specific commodities, the way one needs to understand what is the strut of inflation and where is it coming from, how much is POL contributing to overall inflation, how much is food and food products contributing, primary sector contributing, once you get a fix on that number, on a trend basis, not on a one base but if you look at a phase of last one month, then arrive at the numbers, I haven’t looked at that, then you would be able to say what is the policy response one can arrive at so now the focus should shift away from the level of inflation to the composition of inflation and that’s critical now, we now know for a fact that we are in a high inflation zone, the trend is rising, lets try and get into a decomposition and see where is it coming from and then look at specific policy measures emanating either from the government or from the RBI. Which is why I said that perhaps, the monetary policy will not just focus on interest rates alone, they have to be seemed with doing something, you would also get some sector measures over there as well which would probably dampen pressures a bit more than what the overall macro thing would do."
The iron and steel inflation has gone up 5.6%. The inflation is highest since November 8, 2004. The manufacturing inflation is up 0.9%, while the inflation for all commodities is up 0.5%.Almost all the experts CNBC-TV18 spoke to, agreed that a CRR hike is on the anvils; say a 50 bps hike.
Ashok Desai, Columnist of The Telegraph expects inflation to go down in April and May and surge again after a couple of months. He said market has now factored in high inflation scenario. Year-on-year, inflation will go down below 7% for at least next two weeks, he said.
Sucheta Mehta of Standard Chartered Bank said that the inflation was higher at 7.41% than her original estimate of 7.26%. According to Mehta, the fiscal measures taken are yet to have an impact and will continue to have an effect during the weeks to come. The fiscal measures are yet to show result on the WPI ( whole sales price index).She expects the inflation to remain at an
.Mahta predicts a 50 bps CRR hike to control liquidity, and an appreciation of currency in the near-term.
Tushar Poddar, Goldman Sachs feels that the inflation number is expected to remain elevated at around an average of 6.5% for next 6-months. He expects repo rate hike of 50 bps in the policy meeting. He does not rule out CRR hike this month as well as an RBI announcement even before the scheduled meeting at the end of this month. According to Poddar, the inflation is driven by demand pressure and only by supply side.
Sharmila Whelan, Senior Economist of CLSA expects inflation to remain high. She feels that the RBI may raise CRR and the reverse repo rates. CLSA sees a 7.7% GDP growth in India; which is revised from its earlier forecast of 8.3%.
Rajiv Anand of Standard Chartered Mutual Fund expects the 10-year yield to go to 8.25%. He expects rupee to appreciate and open market operation from RBI.
Sanjay Sinha, CIO, SBI Mutual Funds feels that the market has now factored in high inflation scenario. He feels that India would have to live with higher inflation numbers for sometime now. India is in a phase of higher level of inflation and the monetary measures taken may also not have a significant effect. India may see another quarter of higher zone of inflation, he added. Sinha said that the FMCG sector has been the least affected and he expects this sector to outperform.
Meanwhile, Newswire18 reports that according to Lehman Brothers there is a risk of a 50 bps CRR hike to curb excess liquidity. They expect the inflation to be firmly above the RBI target till December.
JP Morgan is of the view that RBI is likely to tighten the credit policy by hike in CRR by 50 bps before or at the policy. Risk of inflation is seen ranging above 7% for next couple of weeks.
Possibility of CRR hike:
Mehta expects the authorities to use almost all possible tools to climb down inflation more fiscal measures. “We might also see a 50-basis points hike in Cash Reserve Ratio (CRR) to ensure that liquidity is under control and we do see at least in the near-term some appreciation of the currency,” Mehta said.
Mehta added, "We are not expecting a change in the Repo and the Reverse Repo at this point in time. Largely because if we look at the growth picture, we are seeing some visible signs of slowdown on the consumption side. So a trade indeed needs to be worked out between growth and inflation. So while liquidity management would be a better option, interest rate hikes at this point in time perhaps may not be the best possible option. Credit growth is already decelerating and demand side pressures are not there. So we do expect more liquidity management relative to interest rate hike and as one of the previous speakers did mention, that there are more inflationary pressures that might be building up, given the fiscal stimulus that was provided in the previous Budget. And we need to watch out for the impact of those in the coming months, which indeed indicates that inflation would remain high despite the kind of measures that might be adopted.”
Drabu said, “I would think that they would still want look at another week or so then some pre-empting credit policy perhaps the world is not going to come down on you in two weeks time. We are looking at credit policy at the end of the month. I think the RBI would respect that and bring in measures at that point of time and I think there would be whole set of measures not just CRR hike or incremental; incremental CRR hike perhaps is more relevant at this point of time. But some other measures like increasing the risk weightage to slowdown certain sectoral growth and all that would come in. But I don’t know how far that will be useful though.”
How will markets react?
According to Sinha, the market has recalibrated to factor in that we will have to live through a scenario on a period in which the disclosed inflation numbers will be higher than what we have been living with for most parts of 2007 and the Q1 of 2008. “Going forward I think the inflation numbers, which get announced, every Friday may not be the only thing, which will have impact on the market. It has a back-to-back implication in the sense that these inflation numbers are high because the three components, which make up the Wholesale Price Index (WPI) the primary, fuel and the manufacturing components those numbers are higher and that’s why these inflation numbers are high,” he said.
However, Sinha added, “These all translate into a scenario that the margins of the companies in FY09 might get impacted negatively. We will get to see first sight of that when the Q4 results get announced in few days from now. If the impact is going to be fairly severe, I think going forward for the rest of the quarters the impact would also be therefore be equally negative. Therefore at the end of the earnings season we will probably have to revisit as to what are the earnings estimate for FY09 and see as to where the stock prices are in relation to those revised earnings estimates. Then take a view as to how the markets are going to travel from there.”
On commodities and WPI nos:
Drabu does not expect the statistical effect through June because by then, whatever monetary policy measures would have been taken, they would try and have an impact on the level of inflation. “The point is, should you be so concerned about a provisional WPI number because at the end of the day, this is a week on week number; the coverage is very low, it’s subject to revision, it is just an indicative number; it’s not the real threshold or real rate of inflation in a sense like a structurative inflation; it is purely a provisional WPI number. There are huge problems with WPI coverage and we have gone into a different mode of calculating as well as the basket of commodity. Broadly, we are in a phase of higher level of inflation - this will continue for some time, monetary measures taken would not have an immediate effect because this is my belief that it is not an inflation lead by monetary mismanagement; I think its an issue of public policy. So even if monetary measures are taken towards the end of credit policy, they are not going to have a serious impact and also a short-term impact. Monetary policy does not work like that. So we are looking at another quarter of high levels of inflation.”
Mehta said, “ What we have seen on the ground is that steel prices have risen more sharply than what is reflected in the Wholesale Price Index (WPI) that is the first reason. So we are seeing those numbers getting calculated in the WPI. The second important factor is that the fiscal measures that were taken in the past two weeks are yet to show result on WPI reading and this could begin to come in subsequent weeks. I think the picture going forward in the coming weeks is mixed, one is obviously the fiscal measures that have been taken to climb down inflation but the other measures, as I have pointed out is steel prices are higher on the ground relative to what is reflecting in WPI. Secondly ATF prices have been raised to about 12-14% those are yet to filter in the numbers and cement prices. So we expect inflation to remain high in the coming weeks, on an average for FY08-09 we expect inflation at about 6.5%.”
Desai said, “The commodity price figure gets reported and embodied into the WPI quite a few weeks later. So you get unexpected changes in the WPI and it’s quite possible that some of those changes have been reflected in the latest figure. But we are focusing too much on inflation and not thinking about the real economy; the real economy is sinking, the government is very aware of it, machinery production is falling, chemical production is more or less stagnant and the government is very much aware of it and it is trying to refract the economy, it has been trying to increase the purchasing power, it has reduced value added tax, its going to add an enormous amount to government salaries, all these are inflationary factors which will feed into inflation in the next few months. So I expect inflation to grow up further because of these real factors.”
Drabu added, "The issue is that what are the policy options available to the government, very few, particularly after you have played your fiscal policy out in different ways, whether its taxation, whether its expansion restructuring or whether its debt relief to farmers, even that is somewhere contributed to inflation expectations, it has a huge impact on net disposable incomes, so you would tend to see physical controls getting back some way or the other, looking at specific commodities and as Ashok said, we cant do very much with Iron and Steel but still, you would have morals per share and you would probably have some more majors coming in which would address the short term issue but there again its not something that would impact the long term trend of inflation which is what you are really addressing, whether that is today its 7.4 is not the issue, the real issue is that we are on a trajectory of a high inflation and now do you get that down, short term measures would be expected in specific commodities, the way one needs to understand what is the strut of inflation and where is it coming from, how much is POL contributing to overall inflation, how much is food and food products contributing, primary sector contributing, once you get a fix on that number, on a trend basis, not on a one base but if you look at a phase of last one month, then arrive at the numbers, I haven’t looked at that, then you would be able to say what is the policy response one can arrive at so now the focus should shift away from the level of inflation to the composition of inflation and that’s critical now, we now know for a fact that we are in a high inflation zone, the trend is rising, lets try and get into a decomposition and see where is it coming from and then look at specific policy measures emanating either from the government or from the RBI. Which is why I said that perhaps, the monetary policy will not just focus on interest rates alone, they have to be seemed with doing something, you would also get some sector measures over there as well which would probably dampen pressures a bit more than what the overall macro thing would do."
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