What is your anticipation about the CPI because we are pegging it to ease further towards 5.3%?
Upasna Bhardwaj: We are at 5.4%, a marginal downside to the previous reading. Broadly, if we look at the food price index, that still seems to be holding up firm at around 9-9.1% and that is something we believe will keep the inflation slightly on the higher side. I believe we are marginally higher than the market. But having said that, if we look at cereals, pulses, oils and seeds, all of that has started showing significant downside and so prices have been easing. I think going ahead, that impact will be visible across easing of the headline food inflation as well.
But today the headlines are that the rupee has fallen past that 86 per dollar mark for the first time ever. What are your estimates with respect to the rupee movement ahead? Where do you see the currency headed? Do you anticipate that this movement can further put some pressure on the inflation number going ahead?
Upasna Bhardwaj: If we look at the factors which are driving rupee at this point in time, one is, of course, the broader dollar strength visible across the board and that is where we are still awaiting clarity on how long this dollar bull run has to keep going and that will keep the rupee under pressure for sure.
We are seeing a significant amount of capital outflows. The FPI outflows are unrelenting and that is keeping pressure on the rupee. At the same time, what has changed really is that RBI is not keeping a tab on levels. RBI is not intervening to the levels that we have seen in the past and that too is allowing more flexibility for the rupee to move.
So, in all of this, with all the global headwinds we are looking at, let me also add that crude oil prices is another important factor and over the last few days, we have seen crude oil prices go significantly higher and with additional sanctions on Russia, it puts further pressure on the rupee. All of this would weigh on the rupee going forward and the dollar-rupee should trend higher, especially as RBI allows for more movement.
So, honestly, the levels are difficult to say, but yes, we are looking at the range shifting towards 87, 87.50 now. So, over the next few months, we will see an 86.5-87.5 range away from the current range that we are looking at. As you mentioned, all of this will weigh on the overall global side of inflation and the imported inflation would start pouring in again. So, we will be watchful on this front. We will have to see how much of that pass through of the higher oil prices and the impact of rupee we really start seeing in our domestic inflation scenario. But overall, it does pose an upside risk to headline inflation.What are you pencilling in because the global parameters clearly are a challenge. Having said that, food inflation, of course, has eased. Given that you think that there are upside risks to your inflation estimates, what is the band or the range that you are calling?
Upasna Bhardwaj: Next year, we are looking at 4.2% at the moment. But if I was to assign some upside risk coming from the imported inflation side, then this average could shift by 20 or 25 basis points. But again, it will depend on how much of pass through happens from both oil and currency. But yes, it poses a 20-25 bp upside to our average inflation of 4.2% currently.
Onto some of the other macro data, what we see is that there are hopes of easing the inflation, but the IIP number is at a six-month high as well. Does that make a case for a rate cut going ahead, because in February there are some hopes of rate cuts. What are you pencilling in?
Upasna Bhardwaj: We too are expecting a rate cut because if we look at the overall state of the economy, while IIP tends to be very volatile, we should keep that in mind. Of course, the number has been robust. But a large part of this is also supported by a favourable base effect. Q3, of course, has to be slightly better than Q2.
Q2 was very weak in terms of economic activity and corporate earnings too suggested the same and we are looking at some kind of a payback or improvement in the third quarter and even going into the fourth quarter as well. But having said that, overall, we remain fairly bearish on the full year GDP numbers. We are at 6.1% for FY25 and even next year, we have a lot of uncertainties which are there and despite that, of course, we are looking at a number which will be definitely lower than 6.5%.
Given that downside risk to RBI’s and the government’s estimates of GDP is much more, we assign a possibility of a rate cut cycle beginning from February. Having said that, we will have to look at the global environment and account for any likely adverse spillovers that could happen and hence, it will be a close call. We are looking for an overall 50 to 75 bps rate cut through CY25, probably starting from February itself.
