Could scale up its 5% March-end forecast; Rajan may hint at shifting to CPI as inflation anchor
The rate of Wholesale Price Index (WPI) -based inflation, which rose to a six-month high of 6.1 per cent in August, might force the Reserve Bank of India (RBI) to scale up its March-end inflation forecast of five per cent.
Even as the central bank readies to announce the mid-quarter review of its monetary policy — the first under Governor Raghuram Rajan — on Friday, a high rate of inflation is seen limiting its options. The August headline inflation rate rose mainly due to a rise in food prices, and despite core inflation continuing to ease in the month, reflecting the manufacturing sector’s diminishing pricing power.
Though a normal monsoon might ease food prices going ahead, the rupee’s sharp depreciation against the dollar in recent times would pressure on the prices, while the full pass-through of the oil price rise has not yet been realised.
“The central bank may hike its March-end inflation projection due to higher food prices. However, at this point, it is difficult to say how long the pressure on food prices is going to stay,” said Samiran Chakraborty, managing director & regional head of research (India), Standard Chartered Bank.
The non-food manufacturing inflation rate, which has slowed to 1.9 per cent, might also rise in the coming months.
“An increase in the March-end inflation target might be announced in the mid-quarter review or in the next quarterly review because of the rupee depreciation effect. The weakening of the Indian currency does not only affect fuel prices but also pushes manufacturing inflation. There are elements in manufacturing inflation, such as metals and chemicals, which are priced according to the landed cost. So, manufacturing inflation is set to rise in the days to come,” said HDFC Bank Chief Economist Abheek Barua.
According to BNP Paribas, a fall in the rupee’s value is a key upside risk to inflation; but, a more than commensurate fall in global non-energy commodity prices during the same period could largely offset this impact of the currency’s weakness.
Ahead of his first monetary review, RBI Governor Raghuram Rajan is slated to meet Finance Minister P Chidambaram here today. The meeting comes as the ...