Inflation pegged at 6% by March; economists see further rate hikes

Written by fe Bureaus | Updated: Jul 28 2010, 06:47am hrs
The Reserve Bank of India revised upward the annual inflation target by 50 basis points, to 6%, by March 2011 from earlier projection of 5.5%. Taking into account the emerging domestic and external scenario, the baseline projection for WPI inflation for March 2011 has been raised to 6% from our April policy projection of 5.5 %, said RBI

The central bank said the current high rate of pricerise is likely to continue for some more time as demand pressures are building up in the economy. Developments on the inflation front are worrisome. The consumer price inflation remains at elevated levels and demand-side pressures need to be contained. RBI governor D Subbarao said.

WPI inflation has been in double digits since February. Primary food articles inflation continues to be in double digits. Between November 2009 and June 2010, non-food inflation rose from 0 to 10.6% and non-food manufactured inflation from 0 to 7.3 %.

Significantly, non-food items contributed over 70 % to WPI in June, suggesting that inflation is now generalised. Inflation in terms of all four consumer price indices remains in double digits, notwithstanding any decline in recent months.

Going forward, the outlook on inflation will depend on the monsoon, movements in global energy, commodity prices, which have shown distinct signs of softening over the past few weeks, and potential build-up in demand-side pressures with the strengthening of domestic growth drivers, said Subbarao.

However, the central bank will have to take more measures on rate front to contain inflation at 6%, analysts say. Abheek Barua, chief economist, HDFC Bank said the central bankhasalreadyincreasedpolicyratesby100bpsafterTuesdays s move.TheBankexpectsfrequentepisodesofliquiditytightnessgoingahead. This whichmeansthaton an average, repo ratewillremaintheoperativepolicyrate.Thisimpliesanother150bpsofeffectivetighteningentailedintheshiftintheoperativepolicy ratefromthereverserepo totherepo rateoverthelasttwomonths.

Totaleffectivetighteningsofaristhereforeequalto250bps. Thus, weexpectanother50bpsofpolicyratehikesintheremainderoftheyear, he said .

Sonal Varma, India Economist, Nomura Financial Advisory and Securities (India) said, We expect the RBI to narrow further the interest rate corridor by hiking its reverse repo rate by 50bps and the repo rate by 25bps. Cumulatively, we expect 50bps of hikes in the repo rate and 75bps in the reverse repo rate between now and March. While rate hikes should continue due to higher core inflation ), we believe that the pace of moves will be tempered. The next policy meeting is scheduled for September 16.

Deepali Bhargava, economist, ING Vysya Bank explained, With respect to prospects of softening inflation, the central bank feels that it would be contingent on moderation in food prices and global scenario which may generate some favourable impulses.

RBI aims to contain the perception of inflation in the 4-4.5% range, which we feel may be a challenge given a structural shift in inflation, said Bhargava.