Strong revenue growth soon

However, it will primarily be due to the low base effect after demonetisation

The Reserve Bank of India (RBI) is unlikely to cut interest rates in the next policy review in December. The Consumer Price Index (CPI) for October shows retail inflation rising at 3.58 per cent year-on-year (y-o-y).  The Wholesale Price Index (WPI) saw almost exactly the same rate of rise at 3.59 per cent y-o-y. The CPI attempts to measure the impact of price increases on individuals and households, while the WPI looks at producer prices.

The CPI has risen from 3.28 per cent in September; it was only 1.46 per cent in June. One interpretation would be that the deflationary impact of demonetisation is over. The food basket, which has a weight of 45 per cent, saw inflation at 2.26 per cent in October, up from 1.76 per cent in September. The big bounce came in vegetables, which rose to 7.5 per cent in October, from 3.9 per cent in September.

Fuels jumped 6.3 per cent y-o-y in October, up from 5.5 per cent in September. This reflects the hardening of global crude oil prices, which have been passed on at the petrol pump. Core inflation, CPI minus food and fuel baskets, rose 4.55 per cent in October, marginally lower than the 4.6 per cent the previous month.

 The WPI’s food index looks at a different price set and has far lower weight (24.4 per cent). It rose 3.2 per cent. Fuels and power (weight of 13 per cent) was up by 3.1 per cent and overall manufactured articles (weight 64 per cent — this includes manufactured food items) rose 2.55 per cent. However, within these groups, petrol and liquefied petroleum gas prices were both up by 18 per cent. The low rise in the index of manufactured articles indicates lack of pricing power.

 In its previous review in early October, RBI’s Monetary Policy Committee (MPC) estimated retail inflation during October 2017-March 2018 will run between 4.2 per cent and 4.6 per cent— slightly higher than previous projections of 4-4.5 per cent. The MPC is targeting retail inflation well within its target zone of four-six per cent in the medium term.

 Worries on the horizon include two key factors. One is rising global fuel prices and the other is a weakening rupee. The Indian crude oil basket is running at $63 a barrel, considerably higher than the financial year estimate of an averaged $55. There are fears that crude could rise till around $70. If it does, there will be pressure on the current account and the government will also have to make hard calls about retail price controls or consider cuts in the excise rates on petro-based fuels.

The rupee is essentially the central bank’s headache and it has forex reserves of about $400 billion. Some of those are ‘hot money’. These arrived via foreign portfolio investors (FPIs) and could flow out again quite quickly, if FPIs become net sellers of rupee equity and debt. FPIs have invested a net Rs 1.35 lakh crore so far this financial year.

A weaker rupee would help exporters and also cut the current account deficit by making imports less attractive. However, a weaker rupee would also mean more inflation on the fuel front. A stronger rupee would have the opposite effects.

 There is the possibility of some currency volatility due to action by other central banks. The Bank of England has raised rates after many years and is signalling the willingness to hike again. The US Federal Reserve is due for a change at the top. The new chairperson might take it in a different direction. 

Right now, the Fed is signalling that it will continue to hike rates and it is also going to start unwinding the vast bond portfolio acquired during the extended period of Quantitative Easing (QE). The European Central Bank has cut the quantum of its ongoing QE programme.

RBI is likely to preserve its forex ammunition and maintain status quo on rates until it has a clear sense of where the dollar and pound are going. Industrial recovery cannot expect monetary policy help. Any pick-up in credit offtake would have to be driven by demand rather than cheaper credit. However, given the low base effects caused by demonetisation between November 2016 and March 2017, revenue growth could be quite strong through the next two quarters.