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Inflation rate rises, makes RBI’s task tougher

Inflation rate rises, makes RBI’s task tougher
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First Published: Sat, Oct 16 2010. 12 27 AM IST
Updated: Sat, Oct 16 2010. 12 27 AM IST
New Delhi: The task before the Reserve Bank of India or RBI, scheduled to review monetary policy early next month, got a little harder with inflation accelerating amid a slowing of factory output.
The latest data released by the department of industrial policy and promotion showed wholesale price inflation accelerating to 8.62% in September after declining for four consecutive months.
In August, inflation based on the wholesale price index (WPI) stood at 8.5%. This comes at a time when industrial production data for August showed factory output slowing to a 15-month low of 5.6% compared with 15.2% a month ago.
While the deceleration in industrial output was expected to delay any further policy rate tightening, the inflation data may persuade RBI to do otherwise.
The current inflation rate is way above the comfort zone of RBI, which has increased the policy rates five times so far this fiscal to tame inflation, which has become the primary policy concern of the central bank after the domestic economy recovered sharply from the global downturn. In 2009-10, India’s gross domestic product grew 7.4%, while in the current fiscal, it is expected to grow at least by 8.5%.
The International Monetary Fund, in its latest World Economic Outlook report, said that in emerging markets such as India and Brazil, capacity constraints are beginning to boost prices, indicating that such economies may be overheating.
Asked about further monetary steps that the central bank would take to tame inflation, RBI governor D. Subbarao said, “We will study the disaggregate (inflation) data in the money policy review next month.”
The latest rise in inflation was mostly driven by high prices of pulses, vegetables, sugar, fibres and minerals. Weekly food inflation, which was also announced on Friday, accelerated to 16.37% for the week ended 2 October from 16.24% a week ago.
“The inflation figure would be one of the variables to be looked (at) during the review,” Subbarao said on Friday. “I cannot really speculate (on) the monetary policy stance.”
C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, told PTI in an interview that the central bank may have to increase policy rates one more time.
“Inflation is at an uncomfortably high level. So continued actions on the part of RBI may be needed. Perhaps, one more round of tightening as they have done previously may be called for,” he said.
Economists still expect RBI to take a pause and desist from further hiking policy rates on 2 November. Nomura Financial Advisory and Securities (India) Pvt. Ltd economists Sonal Varma and Ketaki Sharma said in a report that the central bank was unlikely to hike policy rates any time soon.
“With policy rates close to normal, we think the marginal benefit from an incremental hike would be limited and we judge RBI could err on the side of caution in assessing the impact of rate hikes delivered so far. We expect the RBI to hold interest rates unchanged this financial year,” they said.
Citigroup India economists Rohini Malkani and Anushka Shah, however, maintained in an advisory that RBI will hike policy rates “once or possibly twice” by the fiscal year-end, though they said recent measures by central banks the world over on tempering capital flows could prompt RBI to follow a wait-and-watch stance in the upcoming policy review.
RBI has desisted from intervening in the foreign exchange market, which has seen net foreign institutional investor (FII) inflows of a record $21.8 billion during the current fiscal, as such a move would infuse additional liquidity into the system, thus further stoking inflation. However, the high level of capital inflows has led the rupee to appreciate 5.53% since April this year, thus eroding the competitiveness of Indian exporters who are still struggling out of the global recession.
Subbarao said the central bank will intervene in the forex market if FII inflows are volatile and disrupt economic conditions. “I can only say that we are watching the situation and our policy is clear. We will intervene if (FII) inflows are lumpy and volatile, or they disrupt macro economic conditions,” he said.
“I cannot really comment on whether we intervene or not,” Subbarao said.
Rangarajan expects the inflation rate to come down to 6.5% by the end of December. The government also expects inflation to ease, primarily because of a fall in food prices on the back of a good monsoon.
Malkani and Shah of Citigroup India expect the fading base effect to result in a moderation in headline inflation to 6% by the year-end. However, they cautioned that continued stickiness in primary articles, possibly due to the growing dominance of structural factors such as rising incomes, changing dietary patterns and stagnant yields, may act as deterrents to easing of inflation.
PTI contributed to this story.
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First Published: Sat, Oct 16 2010. 12 27 AM IST