New Delhi: India’s food inflation accelerated in late August, supporting the case for more interest rate rises, while a top government adviser said price pressures would not ease immediately.
A subdued global recovery and signs that India’s booming growth may have eased in the second quarter have raised the possibility the central bank may hold off on raising rates next week, traders said. Financial markets, however, still expect the Reserve Bank of India (RBI) to raise key policy rates by 50 basis points (bps) by year-end as it struggles to contain inflationary pressures.
Food inflation, which accelerated on higher prices for fruit, milk and pulses, tends to be beyond the scope of monetary policy, but policymakers worry it could bleed into the broader economy and give more ammunition to government critics.
“Inflationary pressures will not decline immediately but they will be down by December,” Montek Singh Ahluwalia, deputy chairman of the Planning Commission and a key advisor to Prime Minister Manmohan Singh, told reporters on Thursday.
Data on Thursday showed the food price index, which has a weighting of over 15% in the wider wholesale price index, rose an annual 11.47% in the week to 28 August, compared with 10.86% in the previous week.
The fuel price index rose an annual 12.71% in late August, the same rate as the previous week.
The yield on the benchmark 7.80% 2020 government bond was unchanged as the data did little to change expectations on the RBI’s monetary policy stance.
Investors are looking ahead to Tuesday’s monthly headline inflation data for more clues on policy.
The central bank has been expected to raise rates again at its 16 September policy review by 25 basis points, though that is by no means assured. Other Asian central banks have also paused their rate hike cycles in recent months, citing growing global uncertainties.
“The base case expectation still remains of tightening, and my view is that there will be a 25 basis points hike in repo and reverse repo rates,” said Nitin Jain, managing director and co-head of fixed income at Nomura in India.
“The bias at the margin is they may not hike but I feel they will use this opportunity to act right now as they are still not in the neutral territory where they would like to be,” he said.
The RBI has already raised the repo rate, its key lending rate, by 100 bps to 5.75% and its reverse repo, or borrowing rate, by 125 bps to 4.50% since March this year.
“Certain food items witnessed a rise in prices due to floods in some parts of the country,” said N R Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi-based think-tank.
“Food inflation is expected to come down to 6% by March, mainly on account of good monsoon across the country and due to the base effect,” he said.
Recent economic data has been subdued. While headline inflation for July eased from double-digits to 9.97%, the Index of Industrial Production rose at its slowest pace in 13 months.
India’s manufacturing sector also expanded at a slightly slower pace in August from July as the pace of new order growth cooled. Industrial output data for July is due on Friday.
“We know that industrial growth is going to slow down, but on the other hand agricultural growth, which was low in the first half, should be a lot better in the second half,” Ahluwalia said.
Central bank sources said there is still more tightening to be done, though the pace of tightening and its intensity will depend on factory output and headline inflation data.
RBI governor Duvvuri Subbarao has said inflationary pressures were easing, but the central bank reiterated last month that its policy priority remains containing inflation.
High prices are a major political issue in India, sparking some street protests. The opposition recently shut down parliament to protest what it called government’s lack of ability to control prices.