New Delhi: Indian inflation rose unexpectedly for the first time in nearly two months in mid January after a strike by truck drivers pushed up prices, but analysts said it was a one-off and more rate cuts were likely.
The Reserve Bank of India will review its monetary policy next Tuesday after aggressively easing its stance over the last four months, and a Reuters poll showed it was tipped to hold interest rates steady.
But a sizeable minority of analysts bet on yet another cut on 27 January to support flagging growth in Asia’s third-largest economy and most believe looser policy is inevitable before the end of the fiscal year in March.
“Our hypothesis is that the nationwide truckers’ strike could have caused a shortage in essential commodities and this price increase,” said Sonal Varma, economist at Nomura in Mumbai.
“We continue to expect repo and reverse repo rates to be cut by a cumulative 150 basis points each by mid-2009, as inflation nears the negative zone.”
The central bank’s main lending rate, the repo, stands at an 8-½ year low of 5.5%, while the reverse repo, the rate at which the bank absorbs funds from the market, has been cut by 200 basis points to 4% since early December.
The wholesale price index, India’s most widely watched inflation measure, rose 5.60% in the 12 months to 10 January, above the previous week’s 5.24% and well above a forecast of 5.05% in a Reuters poll.
Inflation is still well within the central bank’s forecast of around 7% for 2008/09, and some economists said it should cut rates again on Tuesday to send a signal they have not bottomed out.
Back on the roads
Millions of truck drivers last week called off an eight-day strike that had nudged up prices of commodities and disrupted supplies of industrial goods, after talks with the government on measures including cuts in tolls and taxes.
India’s $1 trillion economy has shown signs of slowing amid the global financial crisis and high borrowing costs, after growing at 9% or more for the past three years.
Authorities expect expansion to moderate to around 7% this fiscal year and the central bank chief has said 2009/10 looked like being an even more challenging year.
Early in December, the government cut state-set fuel prices for the first time in nearly two years, and indications are prices may be cut again before a general election due by May.
For the third successive week, provisional inflation data was revised downwards. Inflation for the week to 15 November was lowered to 8.66% from the provisional 8.84%.
Financial markets remained cool to the data with the partially convertible rupee unchanged at 48.9350/48.9400 per dollar from before the data release. The benchmark 10-year federal bond was steady at 5.96%.