They, however, expect some action on liquidity management with capital inflows still remaining significant. “With inflationary expectations strong and global oil prices moving upward, the RBI will definitely keep an eye on inflation. However, presently, I feel RBI can afford to wait and watch and may not take any preemptive action,” Crisil Director and Principal Economist D K Joshi told PTI here on Sunday.
Inflation has increased to 4.41 per cent as on July 14 as against the week-ago figure of 4.27 per cent. A week-on-week rise in inflation should not be a matter of concern, said Kolkata-based United Bank’s Chairman and Managing Director P K Gupta. “Even with a slight increase, inflation is still within the RBI’s comfort zone and below the 4.5 per cent mark,” he said.
However, economists warned that if money supply continued to expand and global oil prices move further up, inflation could become a factor to contend with around October-November.
“International crude prices are firm and any increase could pose challenges, going forward,” Yes Bank’s Chief Economist Shubhada Rao said, adding that “if there are fuel price hikes in the domestic market, then inflation could touch the five per cent mark. I will certainly not say that inflationary pressures are behind us,” she said.
Base effect
So far, the base effect was cushioning against rising inflation even as the appreciating rupee has offset rising global crude oil prices to some extent. “The base effect will keep pulling inflation down for some time and this is a positive,” Joshi said.
The monsoon will also play a role in determining inflation “but we can assess the impact of it only by September,” Bank of Baroda’s Chief Economist Rupa Rege Nitsure said.
The RBI was expected to announce some measures to contain money supply which presently stands at around 22 per cent as against the RBI’s comfort level of 17 per cent, she said.
When asked whether a cash reserve ratio (CRR) hike was expected, United Bank’s Gupta said: “A hike appears to be a drastic action. I would expect something milder.”
Bankers and economists expect the RBI to focus on the market stabilisation scheme (MSS) to tackle liquidity. Capital inflows are expected to remain robust given that “liquidity suppliers such as the US and Japan are likely to maintain their rates low and India being one of the fastest-growing economies in the world, it will definitely attract inflows,” Standard Chartered Bank’s Shuchita Mehta said.
“However, the good news is that capital inflows are coming through the FDI and ECB routes. It is long-term money and not hot money that is coming in,” Mehta said. There could also be a removal of the reverse repo ceiling presently at Rs 3,000 crore, they said.