India’s inflation will continue to moderate but achieving the 4% goal will be challenging for the central bank amid weak monsoons and higher crude oil prices.
(Bloomberg) — India’s inflation will continue to moderate but achieving the 4% goal will be challenging for the central bank amid weak monsoons and higher crude oil prices.
That’s the view of Upasna Bhardwaj, an economist at Kotak Mahindra Bank, who expects headline inflation figures for September — due to be released this week — to ease to 5.3% from 6.83% in August. Price gains will soften for the next few readings, though sustainably driving inflation to the midpoint of Reserve Bank of India’s 2%-6% target aim will be tough, she said in an interview with Bloomberg Television’s David Ingles and Rishaad Salamat Monday.
Rising international crude prices for the world’s third-largest consumer of oil, and deficient rains are key threats to inflation. Governor Shaktikanta Das last week highlighted inflation as a “major risk” to stability and growth in India.
However, the government may absorb the burden of rising crude prices and not let retail fuel prices rise in the next six to nine months, thereby limiting the impact, she said.
Prime Minister Narendra Modi seeks reelection for the third term around May next year, while crucial states will go on polls later this year. A fuel price increase will be deeply unpopular among voters, and economists even expect a cut in prices before the elections.
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Bhardwaj said the RBI’s decision last week to tighten liquidity, while keeping key rates unchanged, was an indirect rate hike of 15 basis points to 20 basis points. This was in addition to a temporary increase in cash reserve requirements for banks announced in August.
The central bank’s liquidity measures are also targeted at averting speculative attacks on the rupee, she said. Such measures raise the short term rates, and help cool inflation expectations. The rupee is under “very high” pressure because of volatile and uncertain global conditions, but “there is a limit to depreciation bias,” she said.
–With assistance from Anand Menon.
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