BackInflation surge shifts focus on RBI minutes
Investors will parse the minutes of RBI's meeting as surging inflation raises questions about this month's interest rate cut and scope for further stimulus
Premium
Mumbai: Investors will parse the minutes of India’s central bank meeting with a keen eye on Wednesday as a steeper-than-expected rebound in inflation raises questions about this month’s interest-rate reduction and scope for further stimulus.
Consumer prices rose 2.4% in July from a year earlier, data showed Monday, faster than the 2.1% median estimate in a Bloomberg survey and in line with the Reserve Bank of India’s 2% to 3.5% projection for April to September. Wholesale inflation also accelerated, indicating pipeline pressures are building up just two weeks after the RBI cut its benchmark rate to a seven-year low and urged the government to help spur investment.
The rupee strengthened in the offshore market soon after the CPI data was published. Investors who bought the rupee by borrowing dollars have earned some 10% this year, the highest carry returns among Asian currencies. Local markets are shut Tuesday for India’s Independence Day holiday.
With indicators pointing to the worst business environment since the 2008 financial crisis, investors will assess how seriously governor Urjit Patel is looking at the growth-inflation trade off. He and his deputy Viral Acharya broke ranks with a colleague to vote for easing following months of pressure from Prime Minister Narendra Modi’s administration for a cut.
“Demand-driven inflation is still fairly subdued and that should worry policymakers," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd in Mumbai. “It still remains below the RBI’s target and growth is also a worry."
Much of the surge in July’s prices can be explained by the fact that they’re no longer flattered by last year’s costs. A drop in food prices slowed to 0.3% in July from 2.1% in June. There are also additional signs of stress, including potential pressures from higher allowances for government employees. The US Federal Reserve is expected to begin reducing its balance sheet this year too, which may trigger outflows from emerging markets.
“As the favourable base effect unwinds, vegetable prices record a seasonal hardening and the impact of house rent allowances pushes housing inflation further, we expect the CPI inflation to ramp up over the next few months," said Aditi Nayar, principal economist at ICRA Ltd. near New Delhi. CPI will rise past 4% by October, which means there’s little chance of any more policy rate cuts in the year through March, she said.
However, when compared with global peers like Indonesia, India’s inflation is still relatively low and Modi’s chief economic adviser Arvind Subramanian has been arguing that there’s a structural shift lower. In his economic survey published last week, Subramanian said the government will find it tough to meet his projection of as much as 7.5% growth in the current fiscal year.
His pessimism stems from a festering bad loan crisis that’s pushing companies to cut debt, keeping investments low and limiting job creation. To ward off rising stress among farmers, who form the bulk of voters, Indian states may write off their loans, further boosting price pressures.
“From now on, India’s inflation rate is going to rise," said Devendra Kumar Pant, chief economist at India Ratings & Research. “Lack of consumer demand and pricing power of producers makes conduct of monetary policy very difficult." Bloomberg
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
