What are your expectations for the CPI, which is expected to ease further towards 5.3%?
Upasna Bhardwaj: It is now 5.4%, down slightly from the previous reading. Broadly speaking, the food price index still appears to be holding steady at around 9-9.1%, which should keep inflation slightly higher. I think it’s slightly higher than the market. But that being said, if you look at grains, pulses, oils, seeds, they’re all starting to show significant downside, so prices are coming down. Going forward, I think the impact will also be felt in the easing of major food inflation.
But today’s headline is that the rupee has crossed $1.86 for the first time in history. What are your expectations for the future movement of the rupee? Where do you think the currency will go? Do you expect this movement to put further pressure on inflation going forward?
Upasna Bhardwaj: If you look at the factors that are pushing the rupee up at the moment, one is of course the dollar strength across the board and we are still waiting for clarity on how long this dollar bull run will last. By the way. This will definitely put pressure on the rupee.
We are seeing large capital outflows. FPI capital outflows continue unabated and pressure on the rupee continues. At the same time, what has really changed is that RBI is no longer monitoring the level. The RBI has not intervened to the extent seen in the past, which has made the rupee more flexible.
So in all of this, I would also add that oil prices are another important factor in the global headwinds that we’re seeing. In recent days, oil prices have increased significantly and additional sanctions have been imposed. Russia is putting further pressure on the rupee. All this will weigh on the rupee going forward and the dollar-rupee should trend higher, especially as the RBI allows more moves.
So, honestly, it’s hard to say what that level is, but yes, right now we’re seeing that range shifting towards 87, 87.50. So over the next few months, we’ll see an extended range of 86.5-87.5 from the range we’re currently looking at. As you mentioned, all of this will weigh on the global side of inflation and imported inflation will start to flow in again. Therefore, we will be careful on this front. It remains to be seen how much of this reflects the impact of higher oil prices and the rupee actually seen in the domestic inflation scenario. Overall, however, there are certainly upside risks to headline inflation.Global parameters are clearly an issue, so what are you writing? Having said that, food inflation is of course easing. We believe there is upside risk to inflation forecasts, but what is that band or range?
Upasna Bhardwaj: Next year, we are currently forecasting a rate of 4.2%. But if we were to allocate the upside risk coming from the imported inflation side, this average could move by 20 or 25 basis points. But again, it depends on how much pass-through happens from both oil and currency. But certainly that would be an increase of 20-25 bps compared to the current average inflation rate of 4.2%.
Looking at some other macro data, we see that despite hopes of easing inflation, the IIP numbers are similarly at six-month highs. Since there are expectations for an interest rate cut in February, will this provide a basis for future interest rate cuts? What are you writing with a pencil?
Upasna Bhardwaj: We also expect rate cuts. Because if you look at the overall economic situation, IIP tends to be very unstable, so you have to keep that in mind. Of course, the numbers are solid. However, much of this is also supported by favorable fundamental effects. Of course, Q3 has to be slightly better than Q2.
The second quarter was very weak in terms of economic activity, and corporate earnings are suggesting the same, and we believe we will see some form of recovery or improvement in the third and even fourth quarter. Masu. But having said that, we still have a fairly bearish view on the full-year GDP numbers overall. FY25 is 6.1% and there’s a lot of uncertainty next year as well, and yet we’re certainly looking at a number that’s definitely lower than 6.5%.
Given that the downside risks to the RBI and government’s GDP estimates are much greater, we believe the rate cut cycle could start from February. Having said that, it will be a close call because we need to look at the global environment and consider the possible negative effects. We are looking at an overall rate cut of 50-75 bps through CY25, probably starting in February itself.
