Will inflation spike force Raghuram Rajan to hike rates in Dec?

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India’s wholesale inflation rose 7% in October from 6.46% in September and a recent low of 4.58% in May. This is more than what most economists estimated. The median of 40 estimates in a Bloomberg survey was 6.95%. Besides, August inflation data has sharply been revised upwards to 6.99% from the original estimate of 6.1%. Food inflation eased marginally—from 18.4% in September to 18.2% in October—but energy inflation rose and primary articles were the driving factor.

The so-called core inflation, or the non-food, non-oil manufacturing inflation, which rose marginally in September to 2.11% year-on-year from 1.94% in August, rose again to 2.6%.

This, along with the rise in consumer price inflation, will put pressure on Reserve Bank of India (RBI) governor Raghuram Rajan for a rate hike when he announces the central bank’s mid-quarter monetary review on 18 December. Will he go for another rate hike?

Based on inflation numbers, he could. Retail inflation rose 10.1% in October from 9.84% in September—again, more than what most analysts and economists expected—but the entire upside was driven by food inflation, which rose 12.3% versus 11.3% in September, and core retail inflation actually dropped from 8.4% to 8.1%.

For the rest of the fiscal—till March 2014—wholesale price inflation is expected to remain at around 7% or even slightly more but retail inflation might drop to single-digits as food inflation—which, has close to 50% weightage in retail inflation—is expected to ease.

Many analysts expect the Reserve Bank of India to raise its policy rate at least by a quarter of a percentage point to 8% by March next year. Can that happen in December? In his address to the media on Wednesday, RBI governor Rajan somehow gave the impression that he is not in a hurry to hike the policy rate. Since he took over in September, he has raised the rate twice—by a quarter percentage point each to 7.75%.

In his address to the media on Wednesday, Rajan pointed out that even though consumer price inflation has risen, core consumer inflation has actually dropped. The latest factory output data also does not show a revival of growth momentum in the manufacturing sector.

Ahead of the next monetary policy review, Rajan will also have another set of data—on inflation and factory output—to make up his mind. At this point, it seems, the governor may decide to wait before he goes another increase in the interest rate—unless, of course, the next set of data springs a nasty surprise.

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