With wholesale price inflation for June at 10.6% and strong possibilities of it being revised upwards, inflation was never expected to taper off in a hurry. Food inflation has now consistently come in above the 10% mark for the 14 th straight month. And at nearly 12.5%, food inflation for the week to July 10, 2010, may have moderated slightly from 12.8% in the previous week, but it?s unlikely to assuage anybody?s anxieties. Least of all the central bank?s.
While it must be clearly concerned about food inflation, the Reserve Bank of India (RBI) has been equally or more worried about non-food manufacturing inflation, which rose to 6.6% in May, and has said as much. So will the central bank hike key policy rates by more than 25 basis points, that the markets have pencilled in, when it meets next Tuesday? There could be a case for a bigger increase because real interest rates continue to remain negative by a fairly wide margin of at least 200 basis points depending on where inflation will be by the end of the year. Indeed, the part of the normalisation of real interest rates, which is expected to happen because of lower inflation, is likely to take its time. It?s also true that ?currency with the public? has risen more than did last year indicating that people are keeping more cash in hand.
The result has been a lower growth in deposits and with credit growth crossing 20%, the central bank must be thinking about this too. But, unless it is privy to information that the rest of us are not, the central bank is likely to nevertheless, hold its horses.
For one, although the IMF may have upped India?s GDP forecast for 2010 to 9.4%, the latest IIP number at 11.5% for May 2010, moderated significantly from the 16.5% in April. Moreover, private consumption isn?t really taking off as it probably should, it?s capital expenditure that has fuelled growth so far. Also, the lower growth now estimated for the developed economies, especially the USA, will weigh on the RBI?s mind.
The good news is that the slower growth in China where the GDP growth for the June 2010 quarter, has come off to 10.3% year-on-year from 11.9% in the March 2010 quarter, partly due to the base effect, may help dampen prices of commodities. Also, the monsoons have been reasonably good so far which means prices of farm products should stay in check. Neither the government nor the central bank will want to upset the growth applecart right now; the government has made all the right moves in terms of freeing fuel prices, keeping the equity markets resilient.
If the Sensex is at 18,000, it?s because investors are betting on better growth in this country and are channelling their investments into Indian stocks and for disinvestments to go through foreign capital flows are a must.
It?s not that interest rates are at very high levels, they?ve been higher than this not so long ago, but the central bank will not want to see rates in the system move up too sharply before the liquidity situation eases. For the time being, therefore, the central bank may stay with a calibrated exit from its accommodative stance rather than turn too hawkish.