Inflation accelerates, nears double digits4 min read . Updated: 15 Sep 2011, 12:35 AM IST
Inflation accelerates, nears double digits
Inflation accelerates, nears double digits
New Delhi: Inflation accelerated to almost double-digit levels, even as concerns of a worsening global economic outlook affecting India deepened after rating agencies downgraded two leading French banks, posing a dilemma to the Reserve Bank of India (RBI) ahead of its mid-quarter review on Friday.
There were fresh claims that the domestic economy was slowing after the Asian Development Bank (ADB) revised India’s growth projections for the current year downwards to 7.9%.
RBI is to decide as to whether it should continue with the rate hike cycle, 11 times since March 2010, or press the pause button.
Most analysts believe that the central bank would continue to target inflation and, hence, go ahead with another round of rate hikes. If indeed it does so, then it would mean costlier consumer and home loans.
Primary articles inflation continued to increase after having moderated in the previous month. Food inflation also rose to 9.1% from 8%, mostly on the back of fish and poultry; fuel products inflation increased to 12.8% from 12% due to the lagged effects of the increase in administered fuel prices.
Though economists have discounted the extent of an industrial slowdown, there is consensus about growth deceleration.
ADB, in an update to its April outlook, revised its growth projection for the Indian economy to 7.9% in 2011 from 8.2%. It also cut the growth forecast for 2012 to 8.3% from 8.8%.
Deloitte Research in its Asia-Pacific economic outlook said interest rate hikes have begun to put a brake on growth. “However, inflation continues to be thekey issue for Indian policymakers. Managing government expenditures and related fiscal deficits will be important for efforts to control inflation and minimize risks to growth," it said.
While the finance ministry continues to claim that it will stick to its fiscal deficit projection of 4.6% of gross domestic product, the trend so far this year suggests it is missing the target in this regard. RBI, in the first-quarter policy review in July, had said that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy action was required. While there is near consensus on a 25 basis points rate increase on Friday, analysts are divided on the way forward.
Citigroup India’s Rohini Malkani and Anushka Shah said in a report: “Given a rapidly deteriorating global environment, which has resulted in most other central banks pausing (the UK, South Korea, Malaysia, the Philippines) and Brazil cutting rates, we are maintaining our view of a pause in rates post Friday."
Standard Chartered Bank India head of research Samiran Chakraborty disagreed. “There is great amount of uncertainty on the inflation trajectory. We do not know whether there is a fuel price hike round the corner and how commodity prices will be impacted in case of another round of quantitative easing by the US Fed," he said.
Sensitive to a slowing economy, the finance ministry has signalled caution.
Chief economic adviser in the finance ministry Kaushik Basu on Tuesday told CNBC TV18 that RBI’s tightening has only impacted growth adversely without significant effect on inflation.
“So we must think outside the box in terms of monetary policy. That is what I will stress to RBI, to anybody who is thinking at this point of time. Look at the global evidence, don’t remain completely committed to what is the correct policy in terms of the text book," he said.
Finance minister Pranab Mukherjee had expressed similar sentiments on 4 September.
“I feel that the existing monetary policy of reigning in inflation may not have to be extended," Mukherjee had said in Kolkata. “If the monetary policy is extended, there will be an overall impact on the growth scenario."
While home and auto loans are expected to rise further if RBI increases rates, R. Desikan, trustee with the Consumer Association of India, said higher rates are justified as they only impact affluent middle class consumers, while the less affluent are impacted more by inflation.
“Unless money supply and inflation is reduced by interest rate hikes, it will not benefit 70-80% of the population, who are poor. Hence, the interest rate hikes by RBI are quite appropriate," he said.
It’s not clear how much RBI?will be swayed by global uncertainty, Chakraborty said.
While the external economic environment is considered key to RBI’s monetary policy decision-making, mixed signals have emerged from the euro zone. Moody’s downgraded two top French banks—Crédit Agricole bank and Société Générale —over exposure to the Greek financial crisis and contagion risk.
However, European stocks rose on Wednesday on the hope of a common euro bond after European Commission president Jose Barroso said he was close to proposing options on joint euro area bond sales.
Brazilian finance minister Guido Mantega said on Tuesday that the leaders from BRICS (Brazil, Russia, India, China, South Africa) nations would discuss aid to the European Union at the annual meetings of the International Monetary Fund and World Bank next week. Economic affairs secretary R. Gopalan said the idea has been thrown open by the Brazilian minister and the BRICS finance ministers will take a call when they meet on 22 September. Chakraborty, however, said, euro bonds will require a lot of negotiations among member states and it is highly unlikely that it will be a reality immediately.
Reuters and Bloomberg contributed to this story.