May inflation data key to RBI move on rates

Manufacturing prices are moving along expected lines but the pace at which they are spreading is a surprise, according to Sachidanand Shukla, chief economist at Enam Securities.

If the trend continues, say experts, the Reserve Bank of India (RBI) may be forced to go for an inter-meeting hike despite the European debt-led fragility in the global outlook.

“Inflation is still a concern as manufacturing prices are high. It is quite possible that the RBI may hike rates before July 27 by 25 basis points to contain inflation,” said Ramya Suryanarayanan, economist at DBS Group in Singapore.

Shubhada Rao, chief economist, YES Bank, concurs.
Revised inflation numbers for March are likely to come in at 10.5%, while provisional data show it at at 9.99%, she points out.

“The RBI will closely watch May data due in June. If manufacturing prices continue to stay elevated, it may trigger some rate hike action by end of June - a repo and reverse repo hike of 25 basis points each,” Rao said.

Mridul Saggar and Suvodeep Rakshit of Kotak Securities, in a note titled ‘The hydra is back’ last week, said their estimates show inflation may stay at about 7% till the end of the current fiscal.

“However, if May WPI also surprises on the up, we can neither rule out a 50 bps hike nor rule out an intra-meeting hike by RBI,” they said.

Ashutosh Datar and Devesh Agarwal, analysts with IIFL, said core inflationary pressures have intensified, with WPI (ex food and
fuel) rising 1.7% month on month (2.2% over past three months), the sharpest rise in almost two years.

“This was due big jump in commodities like metals (up 6.5% month on month), cement (up 4.6%) and cotton textiles (up 2.4%).
Cement prices have since declined in May so this should partially reverse the rise in core WPI by around 10 basis points,” Datar and Agarwal said in a note on Monday.

RBI expects inflation to ease to 5.5% by end-March 2011. But economists beg to difer.

“Rising non-food manufacturing and fuel inflation are likely to keep RBI’s worries on inflation alive,” said Deepali Bhargava, economist, ING Vysya Bank.