May dampen festival cheer; hopes of RBI rate-cut recede

The chances of Reserve Bank of India Governor Raghuram Rajan reducing key lending rates on October 29 look remote with both wholesale price index (WPI)-based inflation and retail inflation for September coming in at higher-than-expected levels.

WPI-based inflation sprang a surprise, rising 6.46 per cent to a seven-month high in September against 6.1 per cent the previous month.

Consumer Price Index-based inflation rose to 9.84 per cent in September from 9.52 per cent in August.

This unexpected rise could cement expectations of a 25-basis-point hike in the repo rate, which is currently at 7.5 per cent. The repo rate is the rate at which banks borrow funds from the RBI.

Despite the surprise in headline inflation, the stock market maintained its upward journey for the fifth consecutive session on Monday. The benchmark indices, which closed near a high for the month, were not affected by the inflation data. The primary articles index, made up predominantly of food products, contributed to the bulk of the inflation, at 18.4 per cent. The sharp increase in food prices was dominated by an 89 per cent jump in vegetables, and a 323 per cent spike in onion prices.

The sharp rise has been attributed to unusually strong rains in producing areas and related supply distortions.

Upward Revision

The Government has also revised the July WPI-inflation reading to 5.9 per cent from 5.75 per cent.

Cumulative headline inflation for the first half of the fiscal year (April-September) stood at 5.5 per cent.

The upswing in September and backward revisions affirm that the brief slippage below five per cent during the April-May period was an aberration, as supply-side constraints have since resurfaced, said Radhika Rao, Economist at Singapore-headquartered DBS Bank.

As base effects wear off, inflation could move higher from October onwards, she added.

(This article was published on October 14, 2013)
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