Inflation close to 1%, RBI may hold rates

Inflation close to 1%, RBI may hold rates

New Delhi: India’s headline inflation rose at a slower-than-expected pace at the start of October, easing pressure on the Reserve Bank to tighten its monetary stance at its policy review later this month.

The widely watched wholesale price index rose by 0.92% in the 12 months to 3 October, well below market forecasts but above the previous week’s 0.7% annual rise.

“Over the last couple of weeks this data has been coming in below consensus, and this reassures us that inflationary expectations, which were building up, may now be assuaged," said Atsi Sheth, chief economist at Reliance Equities in Mumbai.

“We still expect inflation to continue rising, however we don’t believe the rise will be worrying enough for the RBI to tighten aggressively over the next 12-month period," she said.

Prices of food, fuel and manufactured products fell on a weekly basis, which will give comfort to policy makers ahead of the Reserve Bank of India’s (RBI) monetary policy on 27 October.

“The headline inflation is lower than expected. While some moderation was anticipated in line with lower prices of energy-related products, the decline in food article prices is welcome," said Gunjan Gulati, economist at JPMorgan Chase in Mumbai.

Analysts expect no change in interest rates at an 27 October policy review although some expect the RBI to take steps to mop up excess liquidity in the financial system.

Top government officials have repeatedly outlined the need to continue with fiscal stimulus and an accommodative monetary stance to encourage a recovery in the pace of growth.

RBI governor Duvvuri Subbarao has said there was broad agreement that India needs to retreat from its easy monetary stance, but warned of the risks in mistiming such a move.

India’s worst monsoon since 1972, followed by floods in parts of the country have hurt crops, pushing up prices of food items by an annual 13.34% by early October and denting the broader economic recovery.

Faster industrial expansion, reflecting rising consumer demand, is also expected to fan inflation in the coming months.

Analysts expect inflation to rise at an accelerating pace and many predict it will surpass the Reserve Bank’s comfort level of 5% well before the end of the fiscal year on 31 Mach.

The WPI has already risen close to 6% from 28 March, the last reading of the 2008-09 fiscal year, and annual consumer price inflation in August stood at 11.72%.

The RBI left its key policy rate unchanged at its last quarterly review after cutting it by 425 basis points to 4.75% between October 2008 and April to support recovery in Asia’s third-largest economy.

The RBI expects the economy to grow about 6% in the 2009-10 fiscal year, compared with 6.7% last year and 9% or more in between 2005-06 and 2007-08.

The finance ministry’s chief economic adviser, however, expects 7% expansion in 2009-10 on the back of a robust factory output and receding global uncertainties.