monetary policy meet

Rising inflation dims chances of any rate cut by RBI in December

reserve-bank-of-india-reuters (File photo) Representational image

India's wholesale price index (WPI) inflation rose to a six-month high in October on the back of rise in food and fuel prices, official data showed on Tuesday. This followed a similar rise in retail (consumer price index or CPI) inflation on Monday, thereby reducing Reserve Bank of India's scope to cut interest rates in the next bi-monthly monetary policy meeting in December.

The WPI inflation last month rose to 3.59 per cent from a year ago, higher than the 3.01 per cent increase forecast by economists in a Reuters poll. It was also higher than the provisional figure of 2.60 per cent in September.

The CPI inflation too came in at 3.58 per cent in October, a seven-month high.

The RBI, in the last monetary policy, had maintained a status quo, kept the benchmark Repo rate at 6 per cent, despite a sharp drop in the economic growth rate in the April-June quarter.

The central bank had raised CPI inflation forecast from 4.2 per cent to 4.6 per cent range for the second half of the year from 4.0 per cent to 4.50 per cent earlier.

With inflation continuing to go up, it may continue to maintain rates on hold.

"Rising global crude oil prices would pressurise domestic price levels in coming months. Further, an increase in excise duty on petrol and diesel last month, would add to inflationary pressure in the coming months. The rise in food inflation is also likely to be carried forward given the sustained rise in prices of vegetables and fruits," said Madan Sabnavis, chief economist at Care Ratings.

He is not expecting any rate cut in the next monetary policy.

Last week, the government cut Goods and Services Tax on more than 200 items and expects the measure to be disinflationary.

However, Nomura Securities feels that the impact will be limited; it expects CPI inflation to fall only 20 basis points (0.20 per cent).

"The disinflation expected by the government after the GST implementation (in July 2017) did not materialise due to asymmetric pricing response of firms (sticky prices downwards, but more flexible upwards), delayed credit (on input tax and transition stocks) and because benefits from the tax changes manifested in other forms (eg. more volume per pack). This time may not be very different," said Sonal Varma, chief India economist at Nomura.

DBS Bank economist Radhika Rao says inflation trajectory has an upward bias over the next few months and therefore there may not be any rate cut rest of the fiscal year ending March 2018.

"The likelihood of inflation testing the 4 per cent target by late 2017 and staying above it for rest of FY18 reinforces our expectations that the RBI will remain on hold in December and the rest of FY18," said Rao.

Economists also flag other factors—global central bank, including the US Federal Reserve, ending easy money policies, possibilities of government missing fiscal targets due to the GST cuts—which may lead to the monetary policy committee maintaining a neutral rather than an accommodative stance, going ahead.

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Topics : #Inflation | #repo rate | #RBI

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