The Reserve Bank of India (RBI) continued to keep its vigil on inflation as it kept rates unchanged despite retail inflation coming down in July. The policy seemed to have its eye on the inflation target of 6% by 2016 rather than the 8% it targeted by January 2015.
Recent data suggests that the growth is picking up and inflation is falling. But the potential upside risks to inflation in months ahead once the base effect vanishes remain high. Retail inflation dropped to 7.3% in June from 8.3% in the previous month.
RBI governor Raghuram Rajan said, “Risks to inflation remain from poor monsoon, food prices and also oil prices which can be impacted by the geopolitical developments. We are on path in tackling inflation, but we cannot be complacent.”
Arundhati Bhattacharya, chairman, State Bank of India, said in a release, “We believe the retail inflation trajectory will be significantly benign in the current fiscal, but beyond November, the inflation trajectory will be on the upside, though the 8% inflation target by January 2015 looks sacrosanct. The 6% retail inflation target looks challenging (remember, 6% is the upper confidence level of the median RBI target at 4%), and to that extent, the RBI will hold rates at least till that time it is not breached. Banks will thus need to factor possibly a prolonged policy pause in their decision making.”
As the US is headed for higher interest rates and by October, the tapering of the quantitative easing would be complete. Rajan said in a media concall, “That the world has been flush with cheap funds, it is difficult to guess what will happen. People will revisit their investment allocations. There are enough signs in the Indian economy to build a confidence in foreign investors. Nobody now knows whether the money will be short term and not long term. I hope the volatility will be widespread.”
Chanda Kochhar, MD & CEO, ICICI Bank, said in a release, "The monetary policy statement is a reflection of RBI’s continued commitment towards containing inflation. The policy acknowledges the gradual improvement in economic conditions and the government’s commitment to fiscal consolidation.”
Rating agency Crisil said in a report, “The pick-up in rains in the second half of July has reduced rainfall deficiency from over 40% in the month of June to 22% as of August 3, bringing some relief for food inflation. A strong base effect from last year will support moderation in inflation in the second and third quarters. Core inflation also witnessed a considerable fall from 7.9% to 7.2% in June. This decline came after core inflation remained sticky at around 8% for the last seven months.”
“A few weeks of fund outflows from the markets could once again put pressure on the rupee. The central bank cannot afford to lower its guard on the rupee,” Rajan said.
According to the RBI, upside risks to inflation remain. The inflation on fruits and vegetables remain over 10%. The monsoon continues to be below normal. Industrial growth picked up in May to 4.7% with manufacturing sector growing at 4.8%. Above all, the RBI indicated once again on Tuesday that it is aims to lower and sustain CPI inflation to 6% by January 2016.
With the current inflation rate, it is very likely that the January 2015 target of 8% will be met easily. The RBI, however, feels that meeting the target of 6% for January 2016 could be challenging. While the softer near-term inflation rules out any policy rate hike, the RBI is unwilling to concede to the industry demand of an aggressive rate-cut cycle, at least until mid-2015.
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