Nayar also says that typically, Q4 tends to be a much smaller quarter and often moves into a surplus as well. For the year as a whole, we have had to increase our current account deficit forecast. We are now looking at 1.3% to 1.4% of GDP for the full year FY25.
India’s whole price index in November has eased to a three-month low of 1.89% as prices of food items have cooled off. Earlier we did see the CPI numbers also cooling off within the tolerance band for the RBI. What are your expectations going forward and does that really pave the way for a rate cut come February?
Aditi Nayar: It has been quite interesting this month. The numbers broadly came in similar to what we were expecting and yesterday’s wholesale price index inflation came in at 1.9% whereas our forecast was 2%, so just a little bit lower than that. Going ahead, when we look at the trends for food prices, they are still a little bit mixed. Broadly, if we look at things like kharif arrivals, the outlook for the rabi crop, there is quite a lot of positivity as well. But when we look at how quickly the vegetable prices are coming down as compared to seasonal trends, there is a little bit of a mixed picture which is coming through over there. Our sense is that for the CPI, we should be able to get another considerable step down in the CPI inflation to maybe 5 or 5.1% or so in the current month and if that is the case then it should be able to pave the way for a rate cut in the February policy.
On the WPI inflation, the basket is quite different, the composition is very different as compared to the CPI so they do not necessarily move in the same direction month after month. With the WPI, what we feel is that there will be a narrowing in the deflation for commodities and added to that the depreciation that we are seeing in the rupee would also add to some amount of pressure. Possibly the WPI inflation will actually harden a little bit in the current month, somewhere in the range of 2.5% to maybe 2.8% or 3%. It will track a slightly different trend from the CPI in terms of how sequentially things are moving but they will actually end up possibly converging closer together in the month of December than where they were in November.
The food inflation has been sticky for a while now but this time around even that seems to have cooled off. That is a big positive coming in. Is that likely to sustain though and does that indicate that inflation is likely to remain below the 5.7 mark set by the RBI?
Aditi Nayar: As far as the RBI is concerned, what they have indicated is that the CPI inflation is going to move towards the mid point of its medium-term inflation target band of 2% to 6%, so move closer to 4% sometime in the middle of the next fiscal year and that is broadly what we are really going to be looking at. The month-to-month trends and the risks of the emerging trends which are there, do they suggest that we are going to be moving closer to that 4% mark or moving away from it or is the momentum going to stall? As of now, what we feel is that with the December print and with the next few prints, we should be generally moving closer to that 4% mark, which is quite positive.
On food inflation itself, there are some broad positives and the month-on-month sequential trends for some of the specific items are a little more mixed. So, on the CPI side, the food inflation will cool off further, particularly with vegetables, the seasonal trend that we see in December as the temperatures drop, vegetable prices start easing as well and that is something that will show up more in the second half of the month.
On the WPI side, in November, a favourable base effect did pull down the WPI inflation, including food items. But here perhaps we will not see as much of a correction in December. In fact, the WPI food inflation might harden a little bit based on the early trends that we are seeing for wholesale prices and that can happen. Retail prices and wholesale prices of food items can move in a different direction. We have seen that sometimes in the past as well. Overall, the WPI will move up a little bit to 2.5% or slightly higher than that in December and we are hopeful that the CPI inflation will come down to 5.1% in the month of December.
We also had the trade deficit numbers. Now, the trade deficit has also widened to record high levels, with gold being the main culprit. But apart from that, the import bills are also rising. Any take on your expectations on the rupee weakening and its impact on the trade deficit?
Aditi Nayar: As far as the print we got yesterday for the trade deficit, there is an overarching impact of very huge gold imports that we got in the month of November. Now, that is not something we expect will sustain at a level like that month after month. We are hoping that this is a one-off and we are going to start seeing much-much more moderate prints for gold imports in the coming months. As of now, our sense is that the current account deficit in the quarter of October to December is probably going to be around 2.7% to 2.8% of GDP. This will probably be the highest current account deficit on a quarterly basis in the current fiscal year. Typically, Q4 tends to be a much smaller quarter and often moves into a surplus as well. For the year as a whole, obviously, we have now had to increase our current account deficit forecast. We are now looking at 1.3% to 1.4% of GDP for the full year FY25.
