RBI likely to go for 25 bps rate rise.
Fuelled by rises in oil prices, minerals, processed food products and metal rates, inflation rose to 9.44 per cent in June, prompting analysts to say they expected the Reserve Bank of India (RBI) to go for a 25 basis-point increase in policy rates later this month, despite industrial growth showing signs of moderation.
Wholesale-price based inflation has refused to come below nine per cent for months. The central bank is slated to come out with a policy review on July 26. Finance Minister Pranab Mukherjee said, “We are monitoring the price situation closely”, in an assurance that the government was working with RBI to reduce inflation to a more comfortable level.
Economists and bankers, including HSBC country head Naina Lal Kidwai, said RBI would raise repo rate by 25 basis points, following which reverse repo rate would automatically go northward by same basis points.
Rajeev Malik, Senior Economist, CLSA Singapore said, “...the central bank will have little choice but to increase the repo rate by 25 bps to 7.75 per cent...Following the rate rise later this month, we expect the RBI to increase again by 25 bps to 8 per cent on the repo rate by the end of the current quarter before pausing.”
Since October 2010, inflation has been above nine per cent, except for November when it was 8.08 per cent. For May, inflation was 9.06 per cent. Even the high base of 10.25 per cent last year at this point of time could not pull down the rate.
There is also no certainty that inflation will remain at 9.44 per cent for June, since the April rate was revised to 9.74 per cent from the 8.66 per cent estimated earlier. This is despite all the claims of the revised series of inflation reducing volatility. Some rise in inflation was expected, as the government went for price rise of cooking gas (LPG), diesel and kerosene by nine to 20 per cent late last month.
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Expressing concern, Pranab attributed the rise in inflation to increase in administered fuel prices, seasonal effects, an upward movement in mineral prices and imported inflation. However, the silver lining is that the manufactured goods index, minus food products, called the core index in technical jargon, remained flat in June, said Shubhada Rao, chief economist at YES Bank.
The impact of petroleum prices increase was visible, as inflation in LPG rose to 12.17 per cent in June from 11.31 per cent in the previous month and diesel to 6.58 per cent from 5.49 per cent. Separate food inflation figures showed it was up substantially to 8.31 per cent for the week ended July 2 from 7.61 per cent a week earlier. This part of inflation is expected to further go up once the second round of fuel price rises become visible. Economists are expecting inflation to then go up to double-digits.
“The diesel price hike announced a few weeks before is expected to have a lagged effect, forcing inflation to cross into double-digit levels in the coming months,” said Anis Chakravarty, director, Deloitte Haskins & Sells.
Expecting the monsoon to abate food inflation, C Rangarajan, chairman of the Prime Minister's Economic Advisory Council, said he expected the overall rate of price rise to come down to around 6.5 per cent at the end of this financial year.
The government’s Chief Economic Advisor, Kaushik Basu, is more optimistic, having said: “Food articles may face headwinds, but according to the macroeconomics rule of thumb, we should target overall inflation at four per cent.”