Perspective on IIP,CPI numbers from Indranil Pan, Chief Economist, Kotak Mahindra Bank Limited
Growth trends look relatively better and confirm our belief that the economy has bottomed out. However, the sharp jump could have been due to very robust growth in the capital goods segment. The rest of the year should see growth picking up moderately as we expect the government to provide the right dose of policy to boost investments. The bigger focus for today will be on the CPI data where the core has softened in a significant way. Most of the items on the “miscellaneous side”, such as education, medical care have shown substantial reductions. Further, there has also been some softening of the housing inflation. All put together, these momentums represent a softening demand scenario, also reflected in the core CPI inflation at 7.7%, showing a softening over the last few months. The last time core inflation was at 7.7% was in June of 2013. Based on our calculations, we think that both Headline CPI and the core CPI inflation is likely to continue to slide down in the remaining part of the FY, with the RBI probably achieving its first target of sub-8% Headline CPI by January 2015. Thus, we see almost a 0% probability of any rate increases by the RBI through this FY and the next change in the key interest rate will be on the lower side. Our base case is for the RBI to stay on an extended pause, and see through any negative inflation implications that could emerge out of a poor monsoon.
Growth trends look relatively better and confirm our belief that the economy has bottomed out. However, the sharp jump could have been due to very robust growth in the capital goods segment. The rest of the year should see growth picking up moderately as we expect the government to provide the right dose of policy to boost investments. The bigger focus for today will be on the CPI data where the core has softened in a significant way. Most of the items on the “miscellaneous side”, such as education, medical care have shown substantial reductions. Further, there has also been some softening of the housing inflation. All put together, these momentums represent a softening demand scenario, also reflected in the core CPI inflation at 7.7%, showing a softening over the last few months. The last time core inflation was at 7.7% was in June of 2013. Based on our calculations, we think that both Headline CPI and the core CPI inflation is likely to continue to slide down in the remaining part of the FY, with the RBI probably achieving its first target of sub-8% Headline CPI by January 2015. Thus, we see almost a 0% probability of any rate increases by the RBI through this FY and the next change in the key interest rate will be on the lower side. Our base case is for the RBI to stay on an extended pause, and see through any negative inflation implications that could emerge out of a poor monsoon.
