The elevated levels of inflation strengthen economists’ views of an imminent rate hike.


The annual rate of inflation continued at high levels coming in at 15.4% for the week ended 28 August 2010, as compared to 1 5.19% for the previous week. Coming in ahead of the Reserve Bank of India’s monetary policy review scheduled 16 September 2010, the elevated levels of food and overall inflation strengthen economists’ views of an imminent rate hike.

Shubhada Rao, Chief economist, Yes Bank expects a 25 bps rate hike next week, favouring the view that the RBI will take continue its measured steps in the tightening process to avoid over-doing it given the unclear global scenario.

Rupa Rege Nitsure, Chief economist, Bank of Baroda, concurs with this view, adding that the calibrated approach of the Reserve Bank of India (RBI) to monetary tightening will be consistent to growth in certain sectors and uptick in credit demand. She believes that two key data points which the RBI will look at include Index of Industrial Production (IIP) numbers out on 10 August 2010, focusing on quantum and breadth in terms of number of sectors demonstrating robust growth, and also inflation for the month of August primarily because higher frequency data availability is not very good.

Nitsure expects food inflation to continue at elevated levels in her estimates, mainly because the substantial hikes in minimum support price for several food grains is impacting market prices. Simultaneously, the demand for food grain has also increased paralleling the economic transition from a low income to higher income economy. Therefore, production has to catch-up to ease inflationary pressure and there are no short-cuts to that, she adds.

Rao believes that the good monsoon and strong agriculture production will help ease food inflation going ahead. Economists also point out that after September, the base effect will also play a significant part in moderating the annual rate of inflation alongside the impact of monetary tightening carried out earlier this year. Arun Singh, an economist with consulting firm Dun and Bradstreet estimates it will be around 9.7% for the month of August 2010, and expects a 250 bps hike in CRR (Cash Reserve Ratio). "Given that IIP numbers are dipping, if there is a repo and CRR hike in September, further hikes are unlikely," he noted. He expects the rate of inflation to come down to 6.5-7.5% by December 2010, and dip further to 3.5-4% by March 2011.