‘First-cut’ inflation gives hope rate hikes will halt post July 26

The Reserve Bank of India (RBI) will likely hike key policy rates one last time, by 25 basis points (bps), at its monetary policy review meeting coming up on July 26.

That’s the consensus among experts after headline inflation, or inflation based on the wholesale price index, for June came in at 9.44%, well under a projected double-digit growth, despite a rise in the prices of fuel and manufactured products.

However, experts caution against celebrating, saying this is just the first-cut number and a revision cannot be ruled out going forward. For the record, headline inflation numbers for April were revised from 8.66% to 9.74%.

“After considering the April revision, we must note that inflation has been consistently above the 9% mark since January. We expect that the recent fuel price hike will have a lag effect on inflation, too. If the other factors contributing to inflation are not considered soon, we fear that inflation may become systemic,” said Anis Chakravarty, director, Deloitte Haskins and Sells.

Given the RBI’s anti-inflationary stance, most economists see a 25 bps hike in the repo rate as a given. But most also believe that this will be the last rate hike this fiscal.

“From a policy perspective, despite signs of slowing growth, we expect the RBI to continue to focus on inflation in order to bring back still-high inflation expectations. Therefore, we expect a final 25 bps repo rate hike on July 26,” Nomura economists, Sonal Varma and Aman Mohunta said in a report.

A Prasanna, economist with ICICI Securities Primary Dealership, also believes that the apex bank would not go for a rate hike after July as a slowdown in growth has been witnessed of late.

Growth in the index of industrial production came in at 5.6% for May, showing the effect past rate hikes have had.

Some economists believe the central bank’s rate hike spree is set to continue if the inflation doesn’t come under control.

“A 9.44% number is still considerably high and way above the RBI’s comfort zone. We think it makes enough reason for further tightening. A total hike of 50 bps for the rest of the year is our prediction,” said Anubhuti Sahay, economist with Standard Chartered Bank.

 A report by HSBC Global Research suggested as much —- that the trend is up while core inflation is rising.

“The June WPI inflation reading was yet again too high for comfort. The medicine is more and sustained policy tightening,” economists Leif Eskesen and Prithviraj Srinivas said in the report.
Headline inflation had weighed in at 9.06% in May. It has held above the 9% mark since December.

“Government is working together with RBI to take appropriate steps to reduce inflation to more comfortable level,” finance minister Pranab Mukherjee said.

The index for the fuel and power segment stood up 12.85%, compared with 12.32% in May. Diesel, kerosene and LPG prices were revised in May.

Prices of manufactured products went up 7.43% from 7.27% in May.

In line with overall inflation, the weekly food index too rose to 8.31% for the week ended July 2 as against 7.61% in the previous week. However, month on month, food inflation in June was flat at 8.38%.