Money & Banking

All eyes on Rajan as inflation hits 14-month high

| | Updated on: Dec 16, 2013
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Industry says food prices to blame; against hike in rates

Surging food prices pushed November wholesale price index-based inflation to a 14-month high of 7.52 per cent, more or less forcing the hands of Reserve Bank of India Governor Raghuram Rajan to raise the repo rate in the monetary policy review on Wednesday.

Food inflation shot up a huge 19.93 per cent — a near-four-year high. It had risen 18.19 per cent in October. Vegetable prices shot up an alarming 95.25 per cent in November compared with 78.38 per cent in the previous month.

Industry associations, however, have urged the central bank to refrain from increasing rates. The rise in inflation should not come in the way of an accommodative monetary policy announcement, as it was of utmost importance to strengthen investor sentiments that had been adversely affected by high interest rates, said the Confederation of Indian Industry.

The Associated Chambers of Commerce and Industry wanted the RBI to take a contrarian call and hold interest rates, if not drop them, since the data suggested that the rise in inflation is largely the result of a steep rise in prices of food articles, particularly fruits and vegetables.

This inflation level, which is higher than RBI’s comfort zone, provides little leeway for the central bank to cut policy rates. It will also test RBI Governor Rajan’s pledge to tame inflation.

The November WPI has been driven largely by a sharp increase in food prices and marginal rise in manufactured and fuel products.

Coming on the heels of the November retail inflation print of 11.24 per cent, the stubborn WPI inflation may tilt the scale in favour of a 25-basis point rate hike by the RBI on December 18, say economy watchers. Rating agency Crisil expected the RBI to raise the repo rate by 25 basis points to 8 per cent, despite a still-shrinking industrial sector.

If Rajan raises rates on December 18, it will be his third increase since assuming charge of the RBI in September.

The September WPI inflation number has now been revised upwards to 7.05 per cent, from 6.46 per cent announced earlier.

The US Fed policy announcement is also expected on December 18. There are however, mixed views on which way the US Fed will tilt given the recent macro data points.

“My own hunch is that the US Fed Chairman Bernanke will not go in for any taper on December18. RBI Governor Raghuram Rajan may also resist the temptation of a policy rate hike (on the same day),” Jagannadham Thunuguntla, Head of Research, SMC Global, told Business Line .

Published on March 13, 2018

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