Why A Pick-up In Inflation May Not Bother The RBI

Inflation in India is rebounding and is on course to accelerate after the world’s biggest election concludes this month. Yet that is unlikely to distract monetary policy makers from their focus on supporting economic growth.

Data on Monday showed consumer prices rose 2.92 per cent in April from a year earlier, compared with the 2.99 per cent median estimate in a Bloomberg survey of 39 economists. While the reading is the highest in six months, the price growth is, for now, well below the central bank’s 4 per cent medium-term target for this year.

Retail fuel prices present the biggest threat to the central bank’s forecast, with the Indian basket of crude climbing to $70.78 a barrel as of Friday from $66.53 at the end of March. That is being offset by waning domestic economic activity amid a global slowdown and renewed US-China trade tensions, which gives the Monetary Policy Committee room to maintain its dovish tilt after two interest rate cuts this year.

With indicators from car sales to liquidity suggesting that economic activity may be cooling, economists expect at least one more rate reduction in the coming months, possibly as early as the next policy meeting on June 3-6.

“With inflation expected to remain broadly anchored over the coming months, the case for further monetary accommodation gets stronger,” said Siddhartha Sanyal, chief India economist at Barclays Bank. He expects a quarter percentage point rate cut in the June MPC meeting, barring a sharp escalation in political uncertainties. India will have a new government after May 23 when the election results are announced. State-run fuel companies have kept pump prices for diesel and gasoline relatively stable during the elections, but may increase those after the seven-phase voting concludes later this month.

Core inflation, which strips out volatile fuel and food prices, has eased since November last year, with economists expecting it to move toward the headline inflation rate in the coming months. Core inflation eased to 5 per cent in March and Rupa R Nitsure, chief economist at L&T Finance Holdings in Mumbai, is expecting it to cool further to 4.45 per cent in April.

This is reflected in a weak output price inflation in the manufacturing sector’s purchasing managers’ index also, she said.

While policy makers appear relaxed about an uptick in food prices given record food stocks, it is the prospect of weakening growth in rural India that should have them worried should the monsoon rain between June and September fall short.

The monsoon is critical to the farm sector as it accounts for more than 70 per cent of India’s annual showers and irrigates more than half the country’s farmland.

“We believe that weak monsoons, sustained high interest rates, weak rural demand and reduced space for government expenditure will continue to weigh on GDP growth prospects,” said Suvodeep Rakshit, an economist at Kotak Institutional Equities.