Business Standard

RBI may raise inflation target

Could scale up its 5% March-end forecast; Rajan may hint at shifting to CPI as inflation anchor

Related News

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 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 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.

“The key inflationary wild card remains a potential hike in regulated fuel prices, as New Delhi is learnt to be considering raising diesel prices, by about 10 per cent, to ease its oil subsidy burden. If approved, this would add around 0.5 basis points to headline WPI by our estimates,” said Mole Hau, part of the economic research team of BNP Paribas, in a note to clients.

According to market participants, RBI’s tone is expected to be hawkish on Friday, as retail inflation, though declining, is high. It stood at 9.52 per cent in August, compared with 9.64 per cent the previous month.

In fact, there is a possibility of Rajan indicating a shift in inflation anchor from WPI to CPI, as the latter is a more accurate measure of consumers’ purchasing power.

“We may see inflation anchor changing to core CPI from WPI. Core CPI takes away the supply shocks of food and fuel prices and takes into account the elements like rent and transportation. These are crucial elements of a household budget and help gauge the real purchasing power of households more accurately,” said HDFC Bank’s Barua.

On his first day in office, Rajan had said and the government would issue for retail investors inflation-indexed savings certificates linked to the new CPI, as households have expressed a desire to be protected against retail inflation.

However, the markets may not react positively if Rajan indicates his preference of CPI to WPI.

“Markets will also be looking for an indication of his preferred gauge of inflation. They may respond negatively if RBI’s concerns about high retail inflation lead to expectations that CPI will become the new nominal anchor,” Standard Chartered Bank said in a report.

Read more on:   
|
|

Read More

Rajan to meet FM ahead of monetary review

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 ...

Quick Links

More news from Finance Rss icon

Universal financial access faces multiple challenges

While the banks are integrating their systems to ensure that one person does not open multiple accounts, claims processing could be a concern

Impediments in India, Myanmar banking ties

However, in the absence of proper banking and financial services, bilateral trade and investments have taken a hit

Credit card & commercial real estate business improves

For the month of July, the credit card outstanding was Rs 27,300 cr, showing a rise of 18%

Back to Top