Inflation up, but govt sees no RBI rate hike

Inflation up, but govt sees no RBI rate hike
The Financial Express, December 15, 2009, Page 1

fe Bureau, New Delhi, Mumbai

The slingshot rise in headline inflation to 4.78% for November led equity and bond markets on Monday to expect a tightening of the monetary tap by RBI, but senior government officials indicated that nothing was likely to happen soon. Finance minister Pranab Mukherjee told reporters he was concerned by the rise, attributing it to higher food prices.

While the rate at which the wholesale price index has risen prompted analysts to reckon it could handsomely breach the 6.5% target “with an upward bias” set by the RBI for March, finance secretary Ashok Chawla said there is no cause for emergency action. “The government is concerned about inflation rising, but it is not as if we are taken by surprise,” he told reporters.

This puts paid to the chances of an imminent rate hike by RBI as the government feels inflation is fuelled by shortages created by the worst rainfall in 40 years, which monetary tightening can do little to prevent. Instead, it expects an improved supply of grain after December to moderate prices as the rabi crop is harvested.

Explaining the government position, cabinet secretary KM Chandrasekhar told FE he preferred administrative measures to boost supply and contain food price inflation in coming weeks. He also hoped that the need for monetary policy action would not arise as it could deal a “sledgehammer blow” to the economy.

Prime Minister’s Economic Advisory Council chairman C Rangarajan also told FE it was cost-push inflation.

“At present, the higher inflation is largely supply driven. If this supply-driven inflation in primary articles persists, it can develop into a generalised inflationary tendency,” he however cautioned.

Among all commodities, prices of food items rose the highest. Pulses (35.2%), potatoes (101.6%) and onions (32.4%) saw the steepest increases in the month. “We need to find ways to check food inflation, which in turn would help curb prices of manufactured goods,” Rangarajan added.

The worrying trend from the November data is from the manufacturing sector. Prices here rose 3.9% year-on-year for the month from 1.3% in October, suggesting that core inflation is picking up. Nomura Financial Advisory & Securities noted in a report, “Core inflation is starting to rise. Rising global commodity prices are pushing up input cost pressures, beyond just food prices. With demand picking up as well, we expect firms to have a greater ability to pass through higher costs.”

The inflation data pulled down stock market indices. The Sensex lost 21.48 points to end at 17,097.55 while the Nifty ended 11.60 points lower at 5,105.77.

Planning Commission member Saumitra Chaudhuri also said he was not surprised by the latest data. “Inflation is driven by prices of primary and some manufactured food products,” he said.RBI will conduct the next quarterly review of monetary policy at the end of January. Most bankers that FE spoke with also ruled out any immediate rate hike. Punjab National Bank CMD KR Kamath said, “I will go by the statement made by the finance secretary that there was no need to panic.”

Indian Overseas Bank CMD SA Bhat added: “I don’t think RBI will be in a hurry to touch its key policy rates at this point of time, as everyone in the industry knows (inflation) is happening more due to supply-side constraints.”