Inflation has moved almost exactly along expected lines to 6.12%. Will the Reserve Bank of India trod along the expected path of raising rates?
MUMBAI: Inflation has moved almost exactly along expected lines to 6.12%. Will the Reserve Bank of India trod along the expected path of raising rates?
Bankers and economists say that’s a given.
What’s unknown — and therefore causes fear — is whether the RBI will be pushed to take a harder stance by a government that is in a battle of the hustings in a rash of states.
Economists foresee a hike in both, the repo (or overnight lending) rate and the reverse repo (or overnight borrowing) rate by 25 basis points at RBI’s monetary policy review on January 31 - so that corridor of 125 basis points is maintained between the two benchmarks. RBI had tweaked the rates four times last year.
Some even see a bank rate hike together with the increase in the repo and reverse repo rates. The bank rate has been left untouched for quite some time now.
Any tinkering here is a signal that the medium-term rates will remain pretty high, said analysts.
Inflation has pierced past the 6% mark for the first time in about two years. It is also at the highest since Christmas day, 2004. The number stood at 5.58% last week.
Finance St was expecting this spike for two reasons: one, a low-base effect: inflation as on January 7, 2006, or the corresponding date 12 months ago, stood at just 4.4%.
Second, a 30% growth in loans, which is the fastest since 1971 — when the RBI started collecting data — and salaries that are rising at 15% this year (Hewitt & Associates data) are fomenting demand for manufactured products and services in India like never before.
“High inflation is due to rise in prices of food and primary products. The base effect from last year is another reason. We expect inflation to hover around 6% in the next few weeks and touching 6.5% in February,” said Shuchita Mehta, economist-South Asia, Standard Chartered Bank.
The spike in prices are also driven by essential food items such as wheat. “We are facing a shortfall of wheat and importing higher quantity than last year is the reason why bread prices have risen,” said Indranil Pan chief economist, Kotak Mahindra Bank.
He said credit spreads will be impacted because RBI is likely to keep liquidity tight to control credit growth.
Pan does not see prices continuing to rise for an extended period. “Inflation will dip with the seasonal impact of primary prices,” he said.
A source of solace for economists is the fact that inflation, despite breaching the RBI’s tolerance levels of 5.5% two times in two weeks, has been within range on an average the whole of last year.
“The trade-off for continued rapid growth may indeed be that inflation will exceed the central bank’s comfort zone,” Kristin Lindow, sovereign-ratings analyst at Moody’s Investors Service, New York, said on January 16.
“The monetary policy hasn’t been tight enough to tame inflation but has been effective in terms of not choking off growth.”
Economists are also banking on the fact that food supplies will improve as government moves to import stuff, and global oil prices have fallen substantially.
Nymex crude has fallen from a record $78.40 per barrel last year to around $50 per barrel now.
“One has to also bear in mind that global factors spurring inflation have eased a lot because oil prices have fallen,” said Ajit Ranade, group chief economist, Aditya Birla Group.
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