Inflation may rise, but interest rates will dip: IEG

Inflation may rise, but interest rates will dip: IEG

New Delhi: The Institute of Economic Growth, an economic think thank, has said that inflation rate may increase in the coming month but would remain within the RBI’s target range of 4% to 4.5% for this fiscal.

In its latest monthly monitor, IEG said that despite this expected increase in inflation, there could still be a downward pressure on the interest rates in the next few months.

“Two major reasons for this are -- rise in real interest rate following decline in the inflation rates from its peak of 6.5% and the US Federal Reserve’s decision to reduce both discount rate and Federal Fund rate after keeping it constant for nearly two years," it said.

According to the institute’s forecast for the next three months, inflation rate will hover around 3.3% to 4%.

IEG, which is based in the national capital, has been maintaining that domestic interest rate behaviour would depend upon many international factors besides domestic factors.

The interest rate cycle is expected to follow the international interest rate cycles, the institute said.

“Following this, in our view, in the forthcoming monetary policy (or even before), we may see reduction in the policy interest rates and, hence, interest rate cycle to move downward," it said.

According to IEG, the slump in industrial growth to 7.1% in July this year as compared to 13.2% in the same month last year may not put much pressure on interest rates.

It may be noted that the index of industrial production has sustained its expansionary phase for more than four years despite sharp fluctuations in interest rates during the period.

The industrial output growth, it is expected, would decline in the coming months largely due to decline in the demand particularly from the external sector and the imminent slowdown in the US economy could be one of the biggest factors for this exception, IEG said.

But this slowdown will have less impact on the interest rates, it added.