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CPI above 5.5% may push RBI to pause rate cuts: StanChart

The consumer price index (CPI) data and the index of industrial production (IIP) numbers will be released today. Speaking to CNBC-TV18 on the expectation, Samiran Chakraborty of Standard Chartered Bank said the CPI is expected to come in inch to 5.25 percent versus 5.11 percent in the previous month.

According to him, the rise in CPI data is likely to be on account of rising food inflation. He expects food prices to rise 6.5 percent year-on-year but stay flat month-on-month.
To add to macro woes, he expects CPI to stay above 5 percent for March as well. CPI is likely to trend below 5 percent from April till September. Chakraborty believes CPI over 5.5 percent may push the Reserve Bank (RBI) to pause rate cuts. However, sub-5 percent CPI will be positive for the market, he added.

On IIP, Chakraborty is expecting a subdued data on the back of weak exports and poor infrastructure growth.

Below is verbatim transcript of the interview:

Q: What is your expectation on the CPI data because it will be the new CPI data that will be released today for the second month consecutively and what have you decided based on food inflation for the CPI data?

A: We are looking at 5.25 percent for the February CPI print. There are two broad issues on which we had to take a call; one is that there has been a petrol diesel price increase and so, to some extent that will put a bit of an upward pressure from last months figure.

Second, food inflation is the toughest element to call because our sense from looking at the retail price data is that there has been only a marginal decline in food prices in February versus January month-on-month.

However, historically, we have seen a pretty good correlation between the retail price data that we get and the CPI food price data. Since in this new series we will be moving from arithmetic mean to geometric mean we are still not absolutely sure how it is going to impact that correlation between that daily retail price data and the CPI vegetable price and other food prices data.

We will have to wait for a few more data points to establish this correlation and will be able to say whether food prices are correctly reflecting the retail price data or not. For the moment, we are assuming that food prices will remain flat month-on-month which would mean year over year it will be growing at something like 6.5 percent.

Q: How important would this data be from market’s point of view in terms of deciding on how many more rate cuts to expect from the RBI?

A: This print and the next print would be above 5 percent and thereafter in 5-6 months you could see inflation numbers to be sub 5 percent going all the way up to September. If for some reason this print itself is a sub 5 percent print then that is going to be very positive for the market because it will start building in more than 25 to 50 basis points which is currently getting discussed in the market.

So anything above 5 percent will not have too much impact. If for some reason we see this numbers spiking up to 5.50 or above the index the risk that RBI might just went into a slightly longish pause mode to evaluate the inflation.

Q: What are you expecting on IIP?

A: We are expecting a pretty poor number on IIP because exports for January were down almost 11 percent and historically, we have seen a pretty good correlation between exports and IIP numbers.

Infrastructure growth was also pretty weak, just about 2 percent and so, it could be a negative print for IIP this time around.

However, since it is primarily driven by falling export numbers I do not think people will be giving too much importance to it. The fact is that manufacturing is still facing a lot of headwinds and the IIP numbers will just reflect that.

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