The fall in inflation rate in the last couple of weeks is only a temporary phenomenon and the figure is expected to rise to 5.5% to 6% by September, according to Credit Suisse.
Sailesh Jha, chief economist at Credit Suisse (Asia-Pacific) said this would prompt the Reserve Bank of India (RBI) to further tighten the monetary policy by increasing the cash reserve ratio (CRR) by another 100 bps and repo rate by 50 bps in future.
?We expect the interest rate to peak by first quarter of 2008. Moderate inflation, slowing credit and M3 growth, despite strong industrial production, may induce the RBI to pause at leaving the repo and reverse repo rate unchanged, but the risk of a CRR hike before the July 31 credit policy review meeting remains, as the apex is worried about the persistence of strong capital flows. We can expect another hike in CRR by 50 bps when the inflation starts accelerating during September-October 2007. One important fallout of this development would be further appreciation of the rupee, which may touch the 39 level against the dollar by March. By 2009, the rupee may surge to Rs 37.80. But the impact of an appreciating rupee on exports may be limited as Indian exports are becoming more diversified,? Jha added.
Jha, was speaking at an informal meet with the press on Tuesday. He said, ?We expect consumer spending in the US and Japan to rebound in the second half of 2007, along with resilient retail sales growth in China. This would be positive for Indian exports even if the rupee breaks below the 40-mark. Jha believes the RBI is in the midst of a regime change in terms of thinking about the rupee, where it believes rupee appreciation is beneficial for templating inflation and will have limited impact on overall export growth.
He said Credit Suisse forecasts a recovery in consumer spending in the second half of FY07-08 and believes it will contribute to strong GDP growth of 9.4% during FY07-08.
Outside the interest sensitive segments like cars, motorcycles and residential property related to consumer spending, the outlook for consumer durables and staples is positive.