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In an interview with ET Now, Robert Prior-Wandesforde, Head of India and South East Asia Economics, Credit Suisse , talks about the expected hike in key policy rates, inflation and fund flows in the emerging markets .
RBI has hiked interest rates once again in the near term. Do you see another rate hike in the May credit policy? When do you see the RBI pausing its rate hike cycle?
The RBI probably will move again in May. Certainly the statement that obviously accompanied the last move was still pretty hawkish to my mind. The central bank is now with the mindset that it wants to get interest rates clearly above normal, clearly above some sort of long-term average because it recognises now that the economy is also running consistently above trend and consistently bumping into these capacity constraints and that is what is driving these persistent underlying inflationary pressures in the country. I suspect we will see another move in May and I do not think that will be the last either.
We expect further 25 basis point hike to come probably in July. Thereafter, we will see at least a pause. In fact, that may well be the last increase in rates that comes through because by around that time, we are going to start to see evidence that the economy is starting to weaken and that to my mind will put a halt to what has been a pretty aggressive interest rates tightening cycle.
When do you see inflation in India peaking because core inflation continues to remain high and oil prices continue to pose significant risk?
We have seen both wholesale price inflation and consumer price inflation coming down over recent months. So we are already somewhat off the peak, but the trouble of course is that both key measures of inflation, wholesale price and consumer price, have flattened out a bit recently at more uncomfortably high levels of around 8% or so.
Now that is too high for the Reserve Bank's comfort and it is symptomatic of these classy constraints that are there that are pushing up wage growth, that are keeping inflation expectations very high and to my mind, India amongst perhaps all Asian countries are the closest to see some wage prices spiral and that clearly is very dangerous situation is why interest rates have been going up and why they have to go up a little bit further.
So what are your projections for inflation for this fiscal and the next?
What we are going to see is wholesale price inflation in March this year of around 8% again. As far as 12-month time is concerned, obviously a lot in particular for wholesale prices depends on what happens to commodity prices. The structure is such that commodity prices are so instrumental to the development of wholesale price inflation. Our central scenario is that commodity prices overall flatten out around these levels.
Under those circumstances, you do at least see a modest drop in the wholesale price inflation over coming months. By March next year, I would expect the rate to be somewhere in the order of 6% to 6.5%. That is, although better than some of the recent trends is again a little too high for comfort.
What about the rate tightening cycle? Do you see that impacting the growth momentum or would you say that the market interest rates have peaked and therefore, the growth momentum will not be impacted by this factor at least?
Growth is going to disappoint and perhaps disappoint quite significantly in 2011-2012. The first point to make is that the affected tightening of March policy has been one of the more than the actual increase in official policy rates from the Reserve Bank of India because of this big domestic liquidity squeeze. That has forced up short-term money market rates significantly. If we look at 3-month inter-bank rates (for example, they are now nearly 500 basis points from the low). This is a sizable monetary tightening that we seen in India and I do think interest rates matter in the country.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In an interview with ET Now, Robert Prior-Wandesforde, Head of India and South East Asia Economics, Credit Suisse , talks about the expected hike in key policy rates, inflation and fund flows in the emerging markets .
RBI has hiked interest rates once again in the near term. Do you see another rate hike in the May credit policy? When do you see the RBI pausing its rate hike cycle?
The RBI probably will move again in May. Certainly the statement that obviously accompanied the last move was still pretty hawkish to my mind. The central bank is now with the mindset that it wants to get interest rates clearly above normal, clearly above some sort of long-term average because it recognises now that the economy is also running consistently above trend and consistently bumping into these capacity constraints and that is what is driving these persistent underlying inflationary pressures in the country. I suspect we will see another move in May and I do not think that will be the last either.
We expect further 25 basis point hike to come probably in July. Thereafter, we will see at least a pause. In fact, that may well be the last increase in rates that comes through because by around that time, we are going to start to see evidence that the economy is starting to weaken and that to my mind will put a halt to what has been a pretty aggressive interest rates tightening cycle.
When do you see inflation in India peaking because core inflation continues to remain high and oil prices continue to pose significant risk?
We have seen both wholesale price inflation and consumer price inflation coming down over recent months. So we are already somewhat off the peak, but the trouble of course is that both key measures of inflation, wholesale price and consumer price, have flattened out a bit recently at more uncomfortably high levels of around 8% or so.
Now that is too high for the Reserve Bank's comfort and it is symptomatic of these classy constraints that are there that are pushing up wage growth, that are keeping inflation expectations very high and to my mind, India amongst perhaps all Asian countries are the closest to see some wage prices spiral and that clearly is very dangerous situation is why interest rates have been going up and why they have to go up a little bit further.
So what are your projections for inflation for this fiscal and the next?
What we are going to see is wholesale price inflation in March this year of around 8% again. As far as 12-month time is concerned, obviously a lot in particular for wholesale prices depends on what happens to commodity prices. The structure is such that commodity prices are so instrumental to the development of wholesale price inflation. Our central scenario is that commodity prices overall flatten out around these levels.
Under those circumstances, you do at least see a modest drop in the wholesale price inflation over coming months. By March next year, I would expect the rate to be somewhere in the order of 6% to 6.5%. That is, although better than some of the recent trends is again a little too high for comfort.
What about the rate tightening cycle? Do you see that impacting the growth momentum or would you say that the market interest rates have peaked and therefore, the growth momentum will not be impacted by this factor at least?
Growth is going to disappoint and perhaps disappoint quite significantly in 2011-2012. The first point to make is that the affected tightening of March policy has been one of the more than the actual increase in official policy rates from the Reserve Bank of India because of this big domestic liquidity squeeze. That has forced up short-term money market rates significantly. If we look at 3-month inter-bank rates (for example, they are now nearly 500 basis points from the low). This is a sizable monetary tightening that we seen in India and I do think interest rates matter in the country.
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