Inflation eases in August, RBI rate hike seen on Thursday

Inflation eases in August, RBI rate hike seen on Thursday

New Delhi: India’s annual headline inflation eased in August but remained well above the comfort zone of a Reserve Bank of India (RBI) that is still expected by many economists to raise interest rates at its policy review on Thursday.

Inflation remains stubbornly high and the RBI has cautioned that capacity constraints in the rapidly expanding economy will keep up pressure on prices.

Wholesale price index (WPI) rose 8.5% in August compared with 9.8% in July. The figures are the first using a new series of data with a different base year of 2004-05, new components and weightings.

Under the old series, August inflation eased slightly to 9.5% compared with a median forecast for 9.6% in a Reuters poll. July’s reading, based on the old series using 1993-94 as base year, was 9.97%.

“With industrial production data last week showing solid conditions in the manufacturing sector, today’s confirmation that inflation remains uncomfortably high suggests that the RBI is likely to hike rates again when it meets on Thursday," said Brian Jackson, senior emerging markets strategist at Royal Bank of Canada in Hong Kong.

Not everyone expects a rate increase on Thursday.

“Pretty clear deceleration in inflation on the new headline measure. We were already looking for steady hand from RBI on Thursday so this report reinforces our view," said Sean Callow, senior currency strategist at Westpac Institutional Bank in Sydney.

The one-year swap rate fell three basis points to 6.19% after the data, while the benchmark 10-year government bond eased 2 basis points to 7.95% as the downward trend in inflation spurred hopes of a less hawkish policy stance by the central bank.

Commerce minister Anand Sharma said on Tuesday that headline inflation would slow down with the introduction of a new base year for the series,

While some recent indicators had pointed to possible cooling growth in Asia’s third-largest economy, Friday’s July industrial output data was surprisingly strong, boosting the chances of a 25 basis point rate increase on Thursday.

WPI inflation exceeded 10% on an annual basis in the five months through June, based on the old data series, roughly double the level that the RBI is seen to consider acceptable.

The food price index rose 14.64% in August year on year, while the fuel price index was up 12.55%.

Rising prices have sparked public anger against the Congress party-led UPA government, and the Opposition stalled the last session of the Parliament as it protested the government’s inability to control inflation.

With crucial state elections coming up this year and next, Congress chief Sonia Gandhi has said clamping down prices should be the government’s top priority.

On Saturday, finance minister Pranab Mukherjee said he was concerned about inflation and that the central bank would take appropriate measures as and when needed.

The government expects inflation to ease to 6% by December, while the central bank sees that level reached only by March.

The RBI has raised its main lending rate by a total of 100 basis points since March and markets have been pricing in further hikes of 50 basis points by the end of 2010.

India’s economy is on track to grow about 8.5% in the fiscal year that ends on 31 March.