US-Iran Peace Deal Done | Inflation Continues To Surprise On The Downside: Soumya Kanti Ghosh Of SBI

[00:00:00]Uh, let's focus on the macros that is very much the story of the day on the back of that, uh, you know, promise of a peace deal between the US and Iran. Of course, the officially, uh, you know, signing still has to happen. So, we're still trading on optimism, but what does all of this mean for the Indian economy?

[00:00:15]Let's bring in Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, who joins us now. Mr. Ghosh, thank you and a very good morning to you. You know, uh, like I said, we're still riding on an optimism. The deal is yet to be signed. Hopefully, that happens on Friday without any kind of issues. But, you know, given the move that we've already seen in oil, the recovery we're seeing in rupee, to begin with, how does the macro math change? I mean, what kind of sustained levels do we have to see, uh, you know, to be able to say confidently that some of these worries about imported inflation, et cetera, the pressure on CAD will begin to ease?

[00:00:50]>> Yeah, thank you, Ritu, for having me on the show. I think first of all, it's a very good news that the deal is possibly going to be stuck. I understand that the deal would be signed in the night of 15th of June, so which is just earlier couple of days away. So, that's the first thing. The second thing is that we will all hope that this deal is not short-lived and long-lived and gives a solution to the Middle East crisis, which has been brewing now for the last 3 months, if I believe it is correct. I think last 3 and a half months. So, any solution will be greeted by the market very emphatically, and that has been the case today also.

[00:01:29]Uh, and so, that's [clears throat] So, So, these are the positive points. On the macro front, I think the most important point to note is that, uh, if I leave aside the, uh, interest rates and the other things for the time being and concentrate purely on inflation, I think inflation has perhaps continued to surprise a little bit on the downside.

[00:01:48]Even this month inflation number, the market was expecting the street was expecting an inflation number in excess of 4%. It came in at that below 4%. I think around 10 to 15 basis point lower than the market consensus. Last month also the numbers were on the lower side.

[00:02:04]Core inflation continues to be contained at around the same levels as we did the headline inflation. I think both of them are converging. And the only worry is that the rainfalls are significantly delayed this year. I think the cumulative rainfall shortfall is now close to 30%. Uh the hopefully the rains pick up, that would be good news. Otherwise, the prospect of an El Nino and others is now haunting us and that could actually act as an bugbear for inflation numbers and other economic activity going ahead. On the other front, I think the current account deficit I after this FCNRB implementation, hopefully the current account deficit will now trade much lower. The fourth quarter current account deficit was again a surprise. I think the good the positive things in the apart from the market volatility, all the macro numbers are throwing a surprise. The current account deficit was a surprise on the back of strong remittances in the month of March. Which may have been front-loaded because of the Gulf War. And also the GDP growth rate for the last quarter was again a very positive surprise at 7.8%. I think the market was for 50 basis point higher than the market consensus. So overall, I think macro numbers has continued to surprise us positively. But we have to be very careful going ahead because the monsoon is going to be one of the reasons. The The news on El Nino is not that encouraging. Hopefully, I think the clouds will now come in instead of going away as the common parlance.

[00:03:38]>> But more immediately, Mr. Soumya Kanti Ghosh, with the expected oil trajectory, let's keep fingers crossed that this deal does materialize by Friday. We see it getting signed.

[00:03:48]How does the outlook for inflation immediately change? Of course, oil was a risk. perhaps that's receding a little bit, but now you've pointed out monsoon is a bigger fear factor. And then what does that mean in terms of RBI's rate hike trajectory? You know, at least thanks to some of the easing of pressure on the inflation front, perhaps on the rupee as well. Do you think the immediate worry that we could see a hike in August or even October? That at least we could set aside.

[00:04:14]>> Yeah, I think Ritu on the inflation front let's be first take the question on inflation. I think on the inflation front the RBI has said that the assumptions of crude is around $85 per annum per barrel throughout the year. If it goes to around 95, which is also the assumptions of the IEA, the inflation number will be around 5% or higher. And that's exactly the RBI projection at 5.1%, which is also our projection. So, so that's point number one. The second point is on the rate hike I am still not significantly convinced of an early rate hike or even later. We are keeping our fingers crossed and it will be completely data dependent because please note that if the 90% rainfall shortfall projection which IMD has given, that is the weakest since 2001. So I think with such a strong weak forecast of rainfall, delayed rainfall, and the growth consideration could actually take center stage as somehow or down the line. If that is the case, I think the RBI will take a considered call on possibly a rate hike because if the recent measures are any indication that they're largely positive and that would bring a significant amount of liquidity into the system. So this means that the questions on this deposit and credit growth widening could subside at least for the time being or in the second half of the year. But on rate increases, I think the fears of an immediate rate increase I am not so much convinced given that the Reserve Bank may like to look through the cycle, the rainfall, and then take a considered call in the second half of the year on the on the outlook.

[00:05:52]>> Right. Mr. Ghosh, is this a bit of a catch-22 situation for the RBI because on one hand there is a potentially receding headwind in oil prices, and then there is a potentially upcoming headwind in the form of a sub-par monsoon as you highlighted as well.

[00:06:11]In that case, where does the RBI lay its emphasis on? Does it look to focus on the growth trajectory, or does it look to manage a potentially rising inflation? Well, yes, oil prices are falling today, but then there will always be this risk premium that will be associated with oil because supply chains are not fully back to normal yet.

[00:06:32]>> Exactly. I think we should not I think while we will celebrate this deal, but I think we very cautious on the oil front because there has been a significant damage to the Middle East infrastructure, and it will take quite a while to be under that infrastructure. So, I am So, oil prices cannot go back to the earlier assumptions around 50 to 60, which was being forecasted. So, it could at least stay at this level, some rally, and it could stay at this level. But, the good thing is that even if say that this level around 90, that will be good news for India. On the other front, I think it's going to be a very delicate situation of the central bank.

[00:07:08]It has to look through the growth consideration. It has to look through the rainfall. And if the rainfall at if the rainfall is at least I mean, is is lower than what the RBI the forecast actually gets completely downgraded over a quarter of time. From 92% it is downgraded to 90%. Maybe if that gets downgraded, that will of course be a concern. While the link of the drought with the food inflation is not given because there are years when the there has been rainfall has been not been that adequate, but food inflation has been contained. But, I think a bigger worry for the Reserve Bank is that in spite of the increased [clears throat] fertilizer prices, there is the background of the Middle East conflict. One crisis is subsiding, but another crisis could actually start in terms of an inadequate rainfall. So, I think that should be the priority line for the Central Bank.

[00:08:04]>> [clears throat] >> Uh you know, just to sum up all that we've discussed, as a result of these, what is your updated Will will you revise the growth number upwards? Uh do you see a lower CPI number for the year?

[00:08:16]What is the CAD estimate? These three headline numbers, Mr. Ghosh.

[00:08:20]>> Well, I think as of now, we are comfortable with an We are actually given out earlier a projection of 6.6%.

[00:08:26]So, I think we are comfortable with the 6.6% number at this point of time, which captures both the And it's evenly balanced, which captures both the upside and the downside. We believe it properly. Inflation, we are at around 5.1%. There is possibility of an upside to the inflation numbers. And then, current account deficit, we believe that a deficit of around 1.5% would be reasonable to assume with an capital inflow around 55 billion in the current year after the implementation of the measures.

[00:08:58]>> All right, uh Dr. Soumya Kanti Ghosh there. Thank you very much for joining in with how the macro math may change as a result of this deal getting signed and you know, the resulting reactions we're seeing on the crude and on the rupee.

[00:09:11]Thanks very much for that specific