A sharp rise in industrial output may prompt the central bank to raise interest rates after it gets a clearer assessment of inflation, bankers and economists say. The Index of Industrial Production grew 17.6 per cent in April, compared with 13.9 per cent in March and 1.1 per cent a year earlier.
“The economy is on a firmer footing and growth drivers are intact,’’ said Shubhada Rao, chief economist at YES Bank. “Still, the Reserve Bank of India (RBI) can’t breathe easy as far as inflation is concerned and there’s an outside chance RBI may raise rates by 25 basis points before the July policy, in view of strong growth and persisting inflation concerns. Gradualism will be the key.’’
RBI raised repo and reverse repo rates in March and April by a quarter percentage point to cool inflation and rebounding growth and demand. The government will release the inflation data for May on Monday. It last month reported a 9.59 per cent rise in the wholesale price index.
The government’s plan to increase prices of oil and petroleum products may fuel inflation further and may make it tougher for it to meet its year-end target of five-six per cent, says Rupa Nitsure-Rege, chief economist at Bank of Baroda.
Inflation management would be a priority for RBI, said M V Nair, chairman and managing director of Union Bank of India, as inflation is becoming more broad-based, unlike in the past, when it was driven by supply constraints.
“RBI has already initiated exit measures, which was indicated by the increase in policy rates and the cash reserve ratio,’’ said Nair. “My view is that it will continue these measures, particularly on the policy rate side.’’
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The economic recovery was broad-based, though inflation remained worrisome on rising crude oil prices, monsoon uncertainty and demand-side pressures, RBI said in its quarterly monetary policy in April.
The spike in industrial production would increase pressure on RBI to quicken the thus —far gradual pace of policy rate hikes, Nikhilesh Bhattacharyya, associate economist, Moody’s Analytics, said in a report.
RBI has been wary of aggressively hiking rates, as inflation has been mainly driven by supply-side factors beyond a central bank’s control, while the external outlook remains uncertain. However, with industrial production growing at a stronger-than-expected pace and credit growth beginning to pick up, the chance of an inter-meeting rate hike had increased, said the Moody’s analyst. Still, bankers are not concerned that rise in rates will hurt growth.
Any increase in rates by a quarter to half a percentage point might not hurt growth and RBI had been responsive to ensure there was ample liquidity in the banking system, Kalpana Morparia, chief executive officer at JPMorgan, told Business Standard in an interview.
The central bank might raise rates by up to 50 basis points in its next policy announcement, Madan Sabnavis, chief economist at CARE Ratings, said.
Low policy rates could complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in prices of non-food manufactured goods, RBI said while raising repo and reverse repo rates by a quarter percentage point each on March 19.