There is no smoke without fire and if three top policymakers raise the red flag on persistence of inflation, can more tightening be far away?
* The concerns were unexpected because inflation has been easing, and that was acknowledged by the Reserve Bank recently.
* The remarks dampened hopes the central bank would break the eight-month-long monetary tightening cycle that began in February with increases in cash reserve ratio and followed with five sets of hikes in policy interest rates.
This week, bond prices fell, especially reacting to Gokarn?s comments that he saw shocks from food and energy prices continuing in the future. ?Longer term forces are at work on food prices, which are a matter of concern,? said Gokarn.
* Some speculate the officials remarks were triggered by data last week that showed mid-Sep food prices inflation ticked up to a three-month high of 16.4%. Besides moving to a normal or neutral state, RBI had launched the money tightening cycle because of rise in food prices starting November.
SMOKE SIGNALS
Some economists were of the view the market has read more into the remarks than warranted.
A Prasanna, an ICICI Securities economist, found Gokarn?s comments on inflation neither aggressive nor soft. RBI?s ?only objective is to maintain growth even while containing inflation,? said Prasanna, who is a vice-president at ICICI Securities.
RBI will worry about inflation even if it eases to 6%, which is the central bank?s estimate for March end from 8.5% in August. Suppressing inflationary pressures occupies a place of high importance on the RBI?s agenda, and almost all its statements do deal with it, say economists. So the latest remarks by two top RBI officials are not unusual.
?They have been consistent in their communication on inflation,? said Samiran Chakraborty, head of research at Standard Chartered Bank.
He noted that in the past two policy statements (of Jul 27 and Sep 16), the focus was on inflation management. The remarks do not automatically mean that concerns on inflation have heightened and that inevitably more interest rate hikes are on the way, and most likely in the next quarterly RBI policy review on Nov 2.
VERBAL INTERVENTION?
Gokarn?s expression on inflation being above the comfort zone led to sell-off in government securities Tuesday. Today, yield on the 10-year benchmark bond remains around Tuesday?s high of 7.94%.
?Considering what Mohanty has said as well as Gokarn?s comments, it seems to indicate another 25 bps rate hike in November policy,? said a senior treasury official at a UK bank. Whereas Prasanna of ICICI Securities said ?I don?t think that (Gokarn?s) speech should be read in reference to November policy moves.?
Chakraborty of Standard Chartered agrees that no fresh developments had occurred to interpret the remarks as heralds of more rate actions. ?I don?t think that between Sep 16 (when the last policy review was made) and today there is any additional information on inflation that would make RBI more hawkish than before,? he said.
Economists also don?t see the remarks spread over a week as planned ?verbal interventions? to talk yields up. ?This is not a co-ordinated verbal talk,? said Abheek Barua, chief economist at HDFC Bank. ?(The officials) have not taken a consistent line,? he said, but expects a quarter percent hike in rates on Nov 2.
Chakraborty does not expect RBI to also lift its inflation outlook. ?Till the Nov 2 policy, RBI will have only one data point on inflation, so the chance of revising the March end inflation data upward is unlikely,? Chakraborty said.
On Oct 14, government will detail the monthly wholesale price inflation for September.
In recent weeks, many economists have forecast a pause in RBI?s tightening cycle. ?Given the amount of tightening that has already been pushed through in the past six months, we believe that RBI has already hiked rates enough to anchor inflation expectations for now,? said Barclays Capital regional economist Rahul Bajoria in a note.
?We believe that the conclusions reached by (RBI executive director) Mohanty should be seen as verbal intervention to establish monetary policy ground rules, rather than a pre-cursor for further rate hikes.? Bajoria sees inflation below 6% by December.
