Will Reserve Bank of India (RBI) governor Raghuram Rajan increase the policy rate again when the Indian central bank announces its quarterly review of monetary policy on 29 October? The wholesale inflation number for September suggests so but Rajan said in an interview last week that he would look at inflation in the context of economic growth while taking a call on interest rates. Wholesale inflation, in September, accelerated to 6.46% from a year earlier, higher than the expectation of most analysts, and a significant increase over August’s 6.1%. Meanwhile, the factory output data for August, released last week, came in at 0.6%, well below expectations and also lower than the 2.8% seen in July.
The rise in inflation has been driven by food prices—food inflation hit 18.4% in September (versus 18.2% in August). The price of onions rose 323% year-on-year, adding more than half a percentage point to overall wholesale inflation. So-called core inflation, or the non-food, non-oil manufacturing inflation, remained soft at 2.1% even though this was marginally higher than the 1.9% seen in August. Wholesale inflation for July has been revised upwards by 6 basis points to 5.85%. One basis point is a hundredth of a percentage point.
Relatively comfortable trade data and stability in currency will definitely encourage RBI to continue unwinding its mid-July liquidity tightening measures but in the context of rising wholesale inflation, the market is wondering whether the September hike in the repurchase or repo rate (at which RBI lends to banks) should be seen as an one-off, or the first in a series of such hikes. Rajan has made it clear that the two key priorities of the central bank are price stability and financial stability and sustained priced stability ensures economic growth. He has also said the central bank will look at wholesale, retail as well as core inflation.
As of now, it does look as if the retail inflation numbers will hold the key to RBI’s 29 October decision. The government will release the data later on Monday. The market expects retail inflation to remain unchanged at around 9.5%. If that happens, it shouldn’t surprise anyone if Rajan goes for a combination of yet another hike in the repo rate and cut in the marginal standing facility (MSF) rate in the quarterly policy review.
