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Low CPI, easy monetary policy, +ve current a/c ahead: UBS

The Indian economy is expected to disappoint on economic growth this year, which will put downward pressure on inflation. Soft inflation coupled with weaker-than-expected economic growth will lead the central bank to be very accommodative in its monetary policy stance. That’s the thesis of Edward Teather, Senior Economist at UBS Investment Bank.

In an interview with CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Teather said he expects February CPI, to be released today, to come at 5.1 percent, or the lower end of the consensus range.

For the full year, UBS forecasts inflation to average 5.3 percent, he added. This would be on the back of economic recovery “that’s expected to disappointed relative to its potential,” the UBS economist said.

“After cutting rates twice this year, we believe the Reserve Bank of India would cut rates by 25 basis points each thrice more this year,” Teather said.

The weaker-than-expected economy could, however, be a positive for the current account, he said, while forecasting a small surplus for the country for fiscal year 2015-16.

“Current account stood at a deficit of 1.6 percent of GDP in the latest quarter. We believe low oil prices and low gold imports would shave off 1 percent and 0.5 percent respectively off that,” he said.

Below is the transcript of the interview on CNBC-TV18.

Sonia: Today we have a couple of crucial data that we are looking forward to which is the consumer price index (CPI) for the month of February where there is a range between 5 and 5.50 percent. What is your own estimate of what today’s data could look like and in general what is your own estimate of how inflation will pan out from hereon?

A: Our view is that CPI inflation in India is going to come in around 5.1 percent in this month and it is at the low end of the consensus range that you just gave. Our view for the year as a whole is the inflation in fiscal 2015-2016 averages around 5.3 percent. The trend we have going forward is pretty sideways to very slightly up from here. We have had a view, UBS, since the beginning of the last calendar year where inflation will come down more than widely expected and then that would lead to policy rate cuts by the Reserve Bank of India (RBI). That view is consensus — RBI has cut rates but we generally think that inflation could still come in at the low end of where the market in consensus is expecting.

Latha: Some things have marred the picture since, haven’t they? There have been some unseasonal rains in large parts crop bearing areas and that did send vegetable prices peaking in some cities in India. We do not yet know what the impact will be on the February CPI or the March CPI as well some economists notably the IMF yesterday in its report has been worrying that the fiscal targets are getting pushed back and they always have a positive pressure on aggregate demand and tend to push up inflation. Given this are you still likely to give an upward bias to your inflation forecast or you are quite happy with the downward projection?

A: The idea behind our low inflation forecast relative to consensus is that demand in economy and growth in the economy relative to trend or relative to potential is still on the low side. We think that the recovery that people are talking about is going to disappoint a little bit over the next few quarters and that will have downward pressure on inflation. For sure, there is uncertainty about where oil prices would go but the core view we have and that should last through the fuel price moves is that the economy will downward pressure on inflation over the next 12 months.

Latha: So at the moment how many rate cuts are you factoring in the calendar 2015 itself?

A: We have had two so far as you know and we think we will have another three 25 basis point cuts. We think these ones will be at policy meetings. So if you see the April meeting is basically a done deal, no move and the other four remaining meetings we suspect you get one of those will be a pause, so three cuts towards the entering the second half of the year.


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