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Rate hike likely, after prices rise

Rate hike likely, after prices rise
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First Published: Sat, Oct 15 2011. 12 59 AM IST

The Reserve Bank of India (RBI) logo is displayed outside the bank’s headquarters in Mumbai. Photo: Bloomberg
The Reserve Bank of India (RBI) logo is displayed outside the bank’s headquarters in Mumbai. Photo: Bloomberg
Updated: Sat, Oct 15 2011. 12 59 AM IST
New Delhi: Headline inflation for September remained elevated at 9.72%, declining marginally from the previous month, raising apprehensions that the central bank may proceed with another round of interest rate increases in its mid-year monetary policy review due on 25 October.
Inflation, as measured by the Wholesale Price Index, stood at 9.78% in August.
Reserve Bank of India (RBI) deputy governor K.C. Chakrabarty said on Friday that inflation was still too high due to external factors, adding that industrial production costs needed to come down for prices to be reined in.
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“If inflation is as high as 9-10%, we need to do something,” he added on the sidelines of a conference on financial inclusion hosted by the Federation of Indian Chambers of Commerce and Industry.
The Reserve Bank of India (RBI) logo is displayed outside the bank’s headquarters in Mumbai. Photo: Bloomberg
Concerns that successive rate increases were beginning to slow growth momentum had raised expectations that RBI may press the pause button. India’s factory output rose 4.1% in August, the second lowest in 17 months, due to a slowdown cutting across sectors.
The central bank has raised policy rates 12 times by as much as 350 basis points since March 2010. One basis point is 0.01%.
RBI governor D. Subbarao said on Thursday that the central bank is sensitive to the deceleration of growth as well as persistence of inflation. So “we have to weigh growth and inflation concerns”, he said after RBI’s board meeting in Jaipur.
However, he went on to add that with inflation running close to double digits, it would be difficult to bring it down without compromising on growth. “So we are trying to trade off at this time on bringing down inflation even if it means bringing down growth,” Subbarao added.
In September, while food inflation marginally declined to 9.2% from 9.6% in August, fuel group inflation rose to 14.1% from 12.8% a month ago. The widely tracked non-food manufacturing items inflation, or core inflation, declined to 7.5% from 7.8% a month ago.
The Prime Minister’s economic advisory council chairman C. Rangarajan said there was no sign of moderation in the rate of price rise to prompt RBI to change its policy of monetary tightening.
“It is not a very comfortable situation. For the monetary policy stance to change, inflation has to come down and show signs of definite decline. But that kind of an indication has not come,” Rangarajan told CNBC-TV18.
However, economists are still divided over the policy direction RBI may take.
Crisil Ltd chief economist D.K. Joshi favoured another rate hike by RBI. “There is some decline in core inflation, but it is way above RBI’s comfort level. It should be in the range of 4-4.5%,” he added.
Despite a good monsoon, food inflation has not come down drastically, indicating a structural shift in food prices, Joshi said. He further pointed out that the decline in crude prices had also been offset by the rupee’s depreciation, thus nullifying any significant downward impact on commodity price-led inflation.
Shubhada Rao, chief economist at Yes Bank Ltd, however, expects the central bank to pause its tightening. “I hope RBI will look at sequential reduction in core inflation. Given the external fragility, comforting input prices and weakening of domestic growth momentum, RBI will take a pause in its rate hike spree,” he said.
Graphic by Yogesh Kumar/Mint
Reuters and PTI contributed to this story.
asit.m@livemint.com
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First Published: Sat, Oct 15 2011. 12 59 AM IST