Drop in prices of food items coupled with fuel brought down the April inflation, measured on Wholesale Price Index (WPI), to 5.2 percent as against 5.7 percent in March .
Aditi Nayar, Economist, ICRA Limited credits rupee appreciation, stable commodities pinned with a lagged impact of the coal price reduction, electricity tariff revisions as few of the primary reasons for the inflation to soften.
Nayar expects core inflation to remain in the range of 3.4-3.6 percent over the coming months.
In terms of yields, Nomura's Rates Strategist Vivek Rajpal sees a downside if market friendly outcome comes along as they are positioned with a bullish view of rates.
Below is the transcript of Indranil Pan, Aditi Nayar and Vivek Rajpal's interview with CNBC-TV18's Ekta Batra and Reema Tendulkar:
Q: Complete surprise at 5.2 percent, what do you think as the primary reason for the softening?
Nayar: We had expected inflation to soften to around 5.5-5.6 percent. So, this is even lower than what we had pencilled in. I think there were a number of factors that did lend to softness in this month. The rupee had appreciated on an average, commodities were relatively stable. I think there is possibly a lagged impact of the coal price reduction that we have seen over the last quarter, which might have come into the April data. Electricity tariff revisions, which typically starts taking from April onwards have been delayed this year because of the parliamentary elections and also in April we had a petrol price cut whereas the diesel price was not hiked. So whole lot of factors have contributed to the lower print as far as fuel and power is concerned. Also I suspect that core inflation is likely to have remained fairly flat in that month particularly on account of the rupee pressure easing a little bit. To the extent that the direction has been different from what we saw over the consumer price index (CPI) data. That is not very surprising at all because not only is the index very different in composition in terms of the weightage to food and services, but even the components of food as the relative weightages of those are very different than the CPI and the WPI.
Q: We have the April WPI core inflation that is still sticky; it has come in at 3.4 percent versus 3.5 percent. There is a reduction nonetheless, but it is quite sticky compared to what we have seen in the headline index that has reduced significantly, your thoughts on that?
Nayar: I did expect it to be sticky, not very surprised by the fact that it hasn't fallen as far as the headline number has fallen because that apparently has come in a lot more from the fuel index and to some extent from food prices as well. Over the next couple of months, I expect core inflation to remain in the range of maybe 3.4-3.6 percent and not move very sharply either ways unless there is a very sharp movement in the rupee and therefore, price changes start to be passed through to consumers either on the upside or on the downside.
Q: Could you give us your initial reaction to the inflation figure and what is the key thing that stands out for you?
Pan: A lower reading than expectation should always be seen as a positive. At the moment, market is currently driven by many factors, expectation around politics, etc. But I think probably one month down the line, the inflation trend will become an important parameter to determine the rates trajectory.
Q: What is the yield factoring in at 8.77 because there is this slight softening post the inflation data?
Pan: I think 8.77 is a fair value zone. At the moment, market is considering that the hurdle rate for either hike or either cut is very high. So market is definitely not factoring in any monetary easing, neither is it factoring in any hike in the foreseeable future. So I think probably if we continue to get a good trend on inflation like the other day we got a sequential momentum down in the core CPI, if such a kind of a scenario continues then probably two-three months down the line, it will start impacting the markets in a much positive way than what we are seeing now.
Q: We are going into a big event tomorrow, how are you positioning yourself in terms of the yields and what you are recommending to clients as well?
Rajpal: We are positioned with a bullish view of rates. I think there is a downside in it if market friendly outcome comes along which is our base case. I think 8.60-8.65 zone on 5-year and 10-year bond is very likely. Other than that, there are some other technical factors like liquidity will improve etc, which will also push yields lower. As a result, we are relatively quite constructive on bonds at these levels.
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