Column

HONG KONG: Is this just a blip or is double-digit
inflation here to stay?
I think it’s here to stay, unfortunately, and I think it’s going to get higher. I don’t think we’ve seen the peak.

First, this 11% inflation is just the provisional figure; when we see the final figure, it willprobably be closer to 12%.

Secondly, with oil prices where they are —- and in our view they’re probably heading higher —- there is a risk of a further ‘energy effect’ spillover. Also, a lot of people expect good monsoons to bring down inflation.

But the more important driver is what happens to international food and commodity prices because Indian food and WPI inflation tends to lag what happens to international food and commodity prices.

The exchange rate is now turning from a disinflationary force to an inflationary force as well. Base effects are unhelpful until the very end of the year. For all those reasons, inflation will head higher, and won’t show any meaningful fall until early 2009.

So, yes, I think we’re going to be in double digits for at least nine months.

How much of it is the result of a macroeconomic misreading on the part of policymakers? Is the RBI behind the curve?
The WPI measure of inflation is so much out of the government’s control; it’s determined largely by what happens to international oil prices and international commodity prices. These are elements that Indian policy authorities can’t control.

The Reserve Bank did raise interest rates through 2006 and early 2007. I certainly wouldn’t say it’s far behind the curve...A lot of other central banks in the region have been much slower to act.

Having said that, the RBI now has to be seen to be attempting to control inflationary expectation in order to avoid the danger of a wage spiral in India. And that in turn means we’re likely to see further increases in the repo rate and the CRR.

Also, the RBI and the government are going to have to think more seriously about the use of the exchange rate more actively (to fight inflation). The government has to think about duty cuts - which in turn poses greater problems for the budgetary numbers.

How soon do you see the RBI responding?
There’s a good chance we’ll see another intra-meeting move. We’ll see some action before the end-July meeting. That’s probably more likely than not

Is there a case for revising GDP growth figures?
Not necessarily. That depends on whether we see some kind of real income squeeze...And even if there’s a squeeze, whether people will just save less and keep their spending pattern unchanged. That may be their initial reaction.

We have a 7.5 % GDP growth forecast for 2009. We’ve actually revised that upwards after the very strong final quarter numbers in 2007-08. The bigger danger may be to our growth projections for 2009-10, which we’ve put at 7.8%.

The interest rate hikes, which seem pretty likely, will take time to seep through to the economy; it won’t be until 2009-10 fiscal year that we’ll see the effect of that

Will corporate earnings take a knock?
Companies are going to struggle to pass these kind of sharp increases in full at least. Unless they can boost productivity and depress wage costs, the implication must be that earnings suffer, both because of higher costs and to an extent from lower demand as well.

What inflation rate will you be looking at to be assured that it’s manageable?
Until inflation is back down to 4 or 5%, the RBI can’t really be comfortable.