CPI could go up in Oct but will fall in Nov-Dec: Suvodeep Rakshit, Kotak Institutional Equities

In a chat with ET Now, Suvodeep Rakshit, Economist, Kotak Institutional Equities, says next six months probably we are on the comfortable side, in the longer term though structural areas become important. Edited excerpts

ET Now: It would be key to monitor what exactly the implications of the Seventh Pay Commission would be but for now we are seeing the September CPI at a one-year low. What is your view?

Suvodeep Rakshit: The low print is somewhere around 4.5-4.6. More importantly, vegetable and pulses prices have continued to come down in September and that is crucial. Going forward, October might see a little bit of upside but as we hit November-December when the kharif output starts coming in there will be again a fair bit of disinflation from food prices which is positive for the CPI inflation trajectory as a whole.

This reaffirms the belief that inflation continues to be on the lower side which again translates into some space for the RBI to cut rates possibly in February rather than December. I said February simply because I think the December rate cut has been brought forward towards the October 4th policy.

ET Now: How do you see inflation panning out over the course of the next six months because in their fine print, the RBI also laid out that inflationary pressures are still in the works within the economy. There might be a respite due to strong food output and inflation may ease through the next three months. Do you think that can sustain?


Suvodeep Rakshit: A couple of things here, If you look at RBI’s own estimates and this is a combination of what is put out in the monetary policy statement as well as the monetary policy report which gives a slightly longer term view of the CPI inflation. The RBI is actually looking at somewhere close to a 5% in third quarter FY17 and a 5.5% in fourth quarter FY17 which I think is slightly higher than what the market is expecting.

We could have around 4.5% inflation as the average for the next six months and that kind of opens up the room. The next point to note is that food inflation obviously coming down, core inflation continues to remain sticky and that might be a cause for concern for RBI in terms of how to really balance out the headline versus the core inflation kind of debate.

In the miscellaneous side in core inflation, there is some upside from the gold prices. If gold is removed, core inflation falls around 15 bps. So overall,, the disinflationary impulses continue to remain but at the same time if you really look at how typically inflation has panned out in the past for India, there is a fair bit of upside in terms of expectations.

So a couple of points here. Historically, the overall food inflation structural bit has not been favourable for India and secondly inflation expectations does not seem favourable because it continues to indicate an uptick. So hopefully going forward. the expectations channel starts to indicate a downtrend and food inflation structurally through the government’s efforts starts to come down. So overall, next six months probably we are on the comfortable side, in the longer term though structural areas become important.