War on price rise far from over, Rajan likely to hike rates again

By most accounts, as the curtain goes up on another policy review by the Reserve Bank of India (RBI), available indications clearly suggest that the stage is set for another hike in the signal repo rate. Most analysts suggest a hike of 25 basis points is almost certain, given the enormous stickiness in inflation and the discomfiture of the central bank over price rise.

The latest wholesale price index (WPI) number which followed the retail inflation print shows that inflation levels are way beyond RBI’s comfort level, and policy intervention by the central bank to battle inflation will have to be a continuous effort. November WPI inflation surged to 7.5 percent, way above the 5 percent tolerance limit. In October, WPI stood at 7 percent. This higher-than-expected November figure has made a rate hike almost certain when RBI meets on 18 December for its mid-quarter policy review.

[caption id=“attachment_1225635” align=“alignright” width=“380”]  Raghuram Rajan is likely to remain a man with a mission. AFP[/caption]

Importantly, the November spike has been led by food inflation and energy inflation, while core inflation remained broadly steady. While there is a possibility that food inflation may ease going forward, most analysts reckon it is likely to remain beyond comfort levels, prompting a continuance of the hawkish stance on prices.

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Says Leif Eskesen, HSBC’s chief economist for India and ASEAN: “We believe there is a good chance that RBI will hike the repo rate this Wednesday by another 25 bps.” Eskesen reasons that while food inflation may ease somewhat in the coming days owing to improving supply conditions, “underlying inflation is susceptible to upside risks as inflation expectations are sticky and may continue to drift up.”

CRISIL, on its part, also points out that retail (consumer price) inflation also soared to 11.2 percent in November from 10.2 percent a month earlier. The analytics and ratings major points out that core inflation, as measured by its CRISIL Core Inflation Indicator (CCII) rose marginally, as did non-food manufacturing inflation in November. “Momentum indicators suggest that while inflation in primary articles is likely to moderate in the coming months, inflation in manufactured products could accelerate further,” CRISIL says, agreeing with the consensus view of a 25 bps repo rate hike, given that consumer and wholesale inflation have both risen sharply in the past month.

However, Kotak Mahindra Bank has a slightly different view of the core inflation issue. Kotak views the core inflation number of 2.6 percent as a ‘positive takeaway’, saying that showed manufactured products inflation was broadly in check. The month-on-month momentum of core WPI, on the other hand, remains on the higher side. Besides, Kotak argues that with risks of rupee depreciation continuing, there is once again a chance of core inflation moving higher.

Raghuram Rajan’s intolerance of inflation and RBI’s resolve to combat rising prices as top priority was amply clear even in the central bank’s October policy review, when it said: “…it is important to break the spiral of rising price pressures in order to curb the erosion of financial saving and strengthen the foundations of growth. It is in this context that the LAF repo rate has been increased by 25 basis points. Curbing mounting inflationary pressures and managing inflation expectations will help strengthen the environment for growth by fostering macroeconomic and financial stability. The Reserve Bank will closely monitor inflation risk while being mindful of the evolving growth dynamics.”

If the central bank continues with its resolve of closely monitoring the inflation risk, there is little doubt that another rate hike is inevitable, given the absence of serious structural reform to remove bottlenecks and the government’s preoccupation with matters political rather than economic as India heads for general elections in a span of a few months.

The room for RBI to pause its interest rate increasing cycle is severely limited now, and the outlook does not look promising either. For now, while 25 bps looks a reasonable extent, there are even those who bet that the central bank could go further than that in the future. With investment activity limited and growth faltering, that could only mean further tough times for India Inc. But for a central bank keen to ensure there are no inflation-led risks to financial stability as the Indian economy heads into a new year full of external risks, there’s very little option other than monetary tightening.

Raghuram Rajan is likely to remain a man with a mission.