Inflation to stay near current levels, says RBI

Rate hike likely, but inflation worrying
Last Updated 28 October 2013, 16:46 IST

The Reserve Bank of India (RBI) on Monday said it expects inflation to remain near current elevated levels during the second half (H2) of the current financial year 2013-14, but the persistence of high CPI (consumer price index) inflation remains a concern.

The good monsoon should have a salutary effect on food inflation, RBI said, a day before it is forecast to raise its policy interest rate for the second consecutive review.

Mint Street observers expect RBI, at its second consecutive review of monetary policy statement 2013-14 on Tuesday, to increase the repo rate by 25 basis points on Tuesday to 7.75 per cent to fight inflation and also continue unwinding its rupee defense steps.

Meanwhile, in its quarterly macroeconomic review released on Monday, RBI said it expects a “modest improvement” in growth in the second half of the fiscal year. Asia’s third-largest economy grew at 4.4 per cent in the three-months to June, the slowest in four years.

“Both WPI (wholesale price index) and CPI (consumer price index) inflation may stay range-bound around the current levels that remain above comfort levels,” it said in its report.

India’s headline wholesale price index inflation rose to a seven-month high 6.46 per cent in September, driven by food prices such as a 322 per cent jump in the cost of onions, while consumer inflation quickened to 9.84 per cent. In its report, the RBI noted that a drop in food inflation is required to bring down broader consumer price inflation.

Raghuram Rajan, who took over as head of the central bank last month, warned in the report that there is a risk of fiscal slippage due to the widening revenue deficit and high capital expenditure by the government in the first half, which has exhausted over 74.6 per cent of the fiscal deficit target already. “However, pending sufficient supply responses, it is important that monetary policy keeps a tight leash to prevent relative price shocks in the current year from getting generalised,” it said.

On growth, RBI expects modest improvement in the second half (H2) of 2013-14 following a rebound in agriculture and an improvement in exports. However, a fuller recovery is likely to start taking shape towards the end of the fiscal year on the back of current steps to clear impediments that were stalling projects. With deceleration in private consumption and fall in investment, overall demand conditions remain weak. However, a good monsoon and pickup in exports, if sustained, could provide some momentum. At this stage, demand management requires balancing fiscal consolidation with investment support.

RBI said external sector risks have reduced as CAD is likely to moderate since Q2 of 2013-14. The trade balance has responded to the policy measures taken; exports have picked up and gold imports have declined. Broad money growth is largely in line with the RBI’s indicative trajectory, it said.

(Published 28 October 2013, 16:46 IST)

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