There?s near consensus that the repo rate will be hiked by 25 basis points on October 25 to 8.5%. The general line of thought is that since inflation remains well-entrenched and could soon hit double digits and food inflation already at a high of 10.6%, there?s room for tightening rates. After all, the Reserve Bank has been waiting to see softer prices of commodities translate into lower inflation but that?s not happened meaningfully yet and crude oil prices remain almost where they were at the end of July.
The element of suppressed inflation in the Indian economy in the form of fuel subsidies persists and whether the government decides to absorb the costs or pass them on, it will add to inflationary pressure. Also, demand pressures can?t really subside if the government continues to spend ;spends are expected to go up to 4.9% this year.
Also, the central bank has pointed out that demand needs to be rebalanced against consumption and towards investment. As for private consumption, real wages remain positive and thanks to a good monsoon, farm incomes should remain high. Deutsche Bank estimates that private consumption piece should grow at 7% this year, which is high albeit lower than last year?s 8.7%.
Indeed there are companies that have been able to take price increases; Bajaj Auto for instance has upped prices for some of its models. So there?s little reason really why the central bank should not increase the cost of money, especially since the rupee has depreciated sharply in the past couple of months and is nudging 50 to the dollar, undoing some of the impact of the earlier tightening.
To be sure growth is slowing down: both the manufacturing and services PMI have been steadily falling, the IIP numbers are anaemic, CMIE data shows the quantum of new investment proposals at a lowest in nine quarters and the latest evidence comes in the form of an 8% drop in excise collections in September. Moreover, there are now doubts about the star performer?exports. Kotak Institutional Equities has pointed out that trade data on exports of engineering goods firms (including automobiles and metals) doesn?t tally with the numbers put out by top companies in the space. While official data puts exports at $68 billion, exports of engineering companies in the BSE 500 have risen to R63,800 crore. Moreover, it has also drawn attention to the numbers for automobiles saying that while official data puts exports at $5.5 billion in 2010-11, an increase of 74% yoy, SIAM data showed that exports, in unit, had risen just 1.6%. In fact, both Maruti and Hyundai showed a drop in exports last year.
However, while growth is slowing there?s no collapse as seen from corporate India?s performance in the September quarter. Credit data shows reasonably good offtake at around 18% year-on-year though the reality on the ground is that banks have started offering discounts to their card rates for some specific retail products like home loans.
Indeed, after the last policy rate hike in mid-September no bank has really increased its base rate. More than interest rates the corporate sector wants to see action on the policy front. If the central bank does pause on October 25, it would find it hard to justify.