Inflation up at 1.21%, rates may be left unchanged

Inflation up at 1.21%, rates may be left unchanged
The Financial Express, October 23, 2009, Page 2

fe Bureaus, New Delhi

Inflation rose to a higher-than-expected 1.21% for the week ended October 10, compared to 0.92% in the previous week, but policy advisors and analysts expect the Reserve Bank of India (RBI) to leave rates unchanged at its policy review next week. The RBI will announce its mid-term review of the monetary policy on Tuesday.

Analysts expect no change in interest rates at the policy review, although some expect the RBI to take steps to mop up excess liquidity in the financial system. “We maintain that the RBI will remain neutral as risks are still tilted towards growth vulnerability rather than inflation,” said Reliance Equities chief economist Atsi Sheth. Chief statistician Pronab Sen said RBI is unlikely to signal hike in interest rates in its forthcoming monetary review next week despite inflationary reassures. He added that the effect of drought has already been factored into prices so there would not be further acceleration in food prices.

CRR is the slice of deposits banks need to park with the RBI. The RBI left its key policy rate unchanged at its last quarterly review in April after cutting it by 425 basis points to 4.75% since October 2008 to stimulate a slowing economy.Axis Bank economist Saugata Bhattacharya said inflation could touch 7% by March 2010 but expected a status from RBI at the policy review.

Inflation rose mainly due to food and some manufactured items turning expensive. The EAC has said managing food prices will be the government’s biggest challenge in the short run. Raw food articles were expensive by 13% because of a rise in prices of potatoes by 104%, onions by 35%, milk by 10%, pulses by 23% and rice by 13%. Processed food items rose by 16% on a yearly basis as sugar turned dearer by 45%.

The yield on the benchmark 10-year government bond increased by 1 basis point to 7.37% after the release of the inflation data. It had closed at 7.35% on Wednesday. The Prime Minister’s Economic Advisory Council on Wednesday said inflation could touch 6% by the end of the fiscal, driven mainly by rising food inflation. However, EAC chairman C Rangarajan said there was no need to change the current easy monetary stance unless inflationary pressures rise.

RBI governor D Subbarao has said there is an agreement that the country needs to exit its easy monetary stance, but its timing is crucial. The EAC said RBI will watch growth prospects and inflationary pressures while deciding the monetary policy

Industrial output has risen at double digit rate of 10.4% in August this year, after a gap of 22 months. The EAC projects it to expand at 8.2% this fiscal. This would require a double digit growth in the remaining seven months. The index of industrial production grew at 5.8% in the April-August period.

“The direction for primary articles is on a rise. We need to look at the demand side pressures contributing to inflation. Overall, inflation expectations would remain elevated. RBI may sound more hawkish this time,” Yes Bank chief economist Shubhada Rao said.