RBI may unwind some cash tightening steps: experts

Inflation rose to 6.1% in August pushed by food prices

India's headline inflation rose at the fastest pace for six months in August, driven by an 18% jump in food prices, a reminder of the economic pressure new Reserve Bank of India (RBI) governor Raghuram Rajan faces ahead of his first policy meeting this week.

Government data on Monday showed a reading of 6.1%, higher than the 5.80% rate estimated by analysts in a Reuters poll. Food prices soared 18.18%.

The wholesale price index -- India's main inflation measure -- rose an annual 5.79% in July.

Expert views:

Suajn Hajra, Chief economist, Anand Rathi Securities, Mumbai

"This is slightly more than the 5.5% we were expecting mainly due to the pressures from fuel and primary subgroup. I think the RBI won't act on rates in this meeting despite the higher-than-expected industrial output and inflation. However, I think it will unwind some of its cash tightening steps."

Upasna Bhardwaj, Economist, ING Vysya Bank, Mumbai

"WPI inflation in August was primarily led by the rising food and fuel prices. The impact of food on inflation is expected to fade off in the subsequent months, easing price pressure.

Weak domestic demand will further help in offsetting the impact of high global crude oil prices and weak rupee. However, inflation is likely to hover in the 5.5-6.2% range in H2."

R Sivakumar, head of fixed income, Axis Mutual fund, Mumbai

"From a policy-making stand point, we expect RBI to be more objective as manufacturing sector inflation still seems to be contained and they shouldn't react to the higher food inflation number.

"The RBI would be focusing on the strengthening of the currency on the back of lower geopolitical risks with the Syria situation controlled and potentially the Fed tapering easing off with the new expected chair."

Deven Choksey, managing director, KR Choksey Securities, Mumbai

"Core inflation has fallen but food inflation is 18.18% and that is a problem. Market is interested in knowing that whether rates would come down, but I think it will be a courageous call.

"I am more confident now that RBI would be able to take care of situation but expecting a CRR cut is better."

Shakti Satapathy, fixed income strategist, AK Capital, Mumbai

"While rising primary index clearly reflects higher vegetable and onion prices, the fuel inflation have not captured the full impact of recent currency weakness.

"However, consistent moderation in the core inflation indicates the demand pool factors are still subdued. Hence with lower core inflation, expectation of an easing food prices and recent recovery in the rupee would impact the headline figures in a positive way in the coming months.

However, the expected rise in domestic fuel index would be considered as a near term threat."

Rupa Rege Nitsure, Chief economist, Bank of Baroda, Mumbai

"Headline inflation was expected to spike in August mainly on account of the monsoon effect on perishables like onions and the consistent fuel price adjustment impacting transportation costs. India definitely has entered a stagflationary phase".

A Prasanna, economist, ICICI Securities Primary dealership Ltd, Mumbai

"Obviously this leaves RBI in a difficult situation because there is evidence that weak demand is having an effect on pricing power but still overall inflation is quite high on the retail side also. This means inflation expectation will continue to rule high.

"So the issue is current overnight rate at 10.25% is too high but also returning to an overnight rate of 7.25% may not be an option for the RBI. It is a challenging task for the RBI and communicate it to the market.

"Developments in the currency market suggest that RBI should be in a position to start reversing its tightening measures, however, they have to be careful as market could interpret it as tolerating higher inflation."