November’s CPI inflation met expectations at 5.5%, down from October’s 6.21%, raising questions about whether the new RBI governor will consider a rate cut in February.
Concerns about weak industrial growth and low corporate activity in October- December 2024 (Q3FY25) add to the challenges of balancing growth and inflation.
Abhishek Upadhyay of ICICI Securities also weighed in on the path ahead for the central bank.
Q: What is the sense you are getting in terms of the February move? Do you think that if December, came in higher than November at 5.6%, the governor would be in a slightly difficult position?
Bhardwaj: If you look at the high-frequency data for December, the last 10-11 days of food prices, it is not giving us a very great picture. Unless we see the next 14-15 days of a major downtrend in vegetable prices, at the moment, we are still continuing to see price pressures, which means more or less the headline reading looks closer to the existing reading, which is around the handle of 5.5%. And that will pose a little bit of a challenge for the governor.
Eventually, they have emphasised, at least in the past, that they are looking for the last mile of disinflation. So they will have to be watchful on that front and at the same time, the global environment will be crucial. There may be stability, there may be instability, so we will have to wait and watch for that as well before the February policy.
Also Read | RBI’s regulatory actions on lending were warranted, says KV Kamath
Thirdly, the growth aspect – RBI has, as per our estimates, even talked about the second half of the year on the higher side, which is at 7% while we are materially lower at 6.2%. Data going ahead will have to validate that, and we will have to be watchful on all of these fronts to see how things pan out, but I think it is a close call for February. Now, I would not say it is a given. It is there on the table, but the subsequent readings are going to be important to determine whether February is a given call or not for a rate cut.
Q: If you look at the RBI’s October, November, and December, forecast, it is 5.7%. So at the moment, even if it is 5.6% in December, their 5.7% is achieved. But imagine going into a policy when November was 5.5% and December was 5.6% and you are saying that I am very confident of 4% six months down the line, is that credible enough? Do you think they can do that?
Upadhyay: It’s not a done deal, although the baseline view that we continue to stick to is still for rate cuts to start in February. RBI will have a lot more information. They will have the January high-frequency price data as well when they meet in February, and that could be crucial. You have to recognise that the inflation profile is changing quite rapidly between quarters. So October, December is 5.7%, January, and March is 4.7% and then as you head into the next fiscal year, inflation is going down towards 4%. So inflation profile is moving rapidly, and as long as inflation internals don’t worsen, and we don’t see a real worsening or a real broadening out of price pressures, given the global backdrop we have currently, with the commodity prices, etc, being quite low. The data on growth, which we expect to improve, but there could still be some downside risk to the RBI forecast.
Given this backdrop, and with the framework that monetary policy has to be forward-looking, we think RBI should be able to start its policy recalibration process. We think they have moved in quite an orderly way by changing stance first and then announcing a cash reserve ratio (CRR) but I think the natural course will be for them to ease in February.
Q: By the time you come to February 6 or February 7 or whenever the policy is, you will get the revisions also. The Chief Economic Advisor (CEA) has gone on record to say that 5.4% is likely to get revised. Do you think there is a good chance that when he comes in the first week of February, the growth picture is not as bad as this 5.4% made us believe? You all have a stronger view of the second-half growth.
Upadhyay: They will have the first advance estimates, which is data effectively for the first eight months only, which could well be lower. We were extrapolating growth from the first half, which has been weak for the full year, so that number could well be on the softer side.
But, yes, our base case is growth in the second half of the year should be 7% and as we move into the next fiscal year, it should go down somewhere between 6.5% and 7% which is our estimate of trend growth. So absent of global recession or a supply-side shock-led surge in global commodity prices, we think that is where growth should settle down.
Also Read | New panel under SBI chairman to review NPA transfers to NARCL; banks to track top 20 NCLT cases
Second half growth – agriculture growth itself can be double the growth rate in the first half and government spending will be strong. So all this suggests, growth should be better. How much better? We have to see, and we will not have clarity about that till the end of the fiscal year.
Q: What’s your sense of how much growth can pick up? Do you think that the FISC will be able to spend all that they have not spent in the previous months? And liquidity has loosened, from the RBI’s point of view. But if you see the daily interbank liquidity, it is still tight. Deposits, even by the state-owned banks are being raised at 8% etc. So do you think growth can get charged in the third quarter and in January because of fiscal spending and somewhat monetary looseness?
Bhardwaj: We too, expect that the government spending has to pick up. But having said that, there’s a limit to which the capex can pick up within a short period. So we are looking at a fiscal deficit of about 4.6% of GDP, about 30 basis lower than what they have budgeted. Much of that is coming because of the inability to probably spend entirely what they have budgeted under capex.
So we believe that the government will not be able to spend completely, and that will have a bearing. That is one of the reasons why we believe that the second half will not be as strong.
We also believe that from 5.4% clearly the second half of the year has to be better. So that part is clear, the scale at which the improvement will be seen is a function of how much government spending will be there. I agree with Abhishek Upadhyay, agriculture is one sector wherein we will see a big contribution coming from.
But apart from that, the private segment is fairly weak still. Until we don’t get clarity further on that data, we remain a little sceptical on that front. So in the non-farm private sector, we believe that demand is a little patchy, and that will keep overall growth at sub 6.5% for the second half of the year. So, we are a little on the downside there.
For more details, watch the accompanying video
Catch all the latest updates from the stock market here
About The Author
