Retail inflation dips, but may not stop a rate hike

Inflation slowed to 3.69% in August on softening food prices

NEW DELHI: The monetary policy panel of India’s central bank may be forced to raise interest rates in October to stem a slump in the rupee, despite retail inflation slowing to a 10-month low in August.

The rupee on Wednesday weakened to a fresh all-time low of 72.91 against the dollar before recovering to close at 72.19, after

reported that the government might announce measures to halt the decline at an economic review meeting on Saturday.

Though no official word was available, economic affairs secretary Subhash Chandra Garg on Wednesday said the government and the Reserve Bank of India (RBI) would take all possible measures to stabilize the currency. “No fundamental rationale for rupee to depreciate to levels we saw till yesterday. It reflected overreaction of market operators. Government and RBI will do everything to ensure that rupee does not slide to unreasonable levels. Today’s correction seems to reflect that realization,” he tweeted. Year to date, the rupee has weakened about 12% against the dollar, while foreign investors have sold $538 million and $6.38 billion in equity and debt markets, respectively.

Retail inflation slowed to 3.69% in August because of softening food prices, from 4.17% in the previous month. Despite the deceleration in inflation, economists say RBI may go for a third consecutive hike in interest rates at its October 5 monetary policy

Bloomberg

review to check capital outflow and stabilize the rupee.

“On balance, the scales appear tipped towards a third consecutive rate hike in the October policy review, along with a change in stance to withdrawal of accommodation, unless crude oil prices and the rupee record an appreciable reversal in the intervening period. However, the decision to hike the repo rate is unlikely to be unanimous,” said Aditi Nayar, principal economist at Icra Ltd.

Madan Sabnavis, chief economist at Care Ratings concurred. “Given the developments in oil market and currency, we expect a rate hike of 25 bps (basis points) in October policy notwithstanding the sub-4% inflation number.” RBI, in its policy review on 1 August, had raised its policy rate by 25 bps for the second time in two months, blaming rising inflation risks. While there have been talks that the government may tap India’s wealthy non-resident Indians through a bond issue to raise additional foreign exchange, a government official on condition of anonymity said such measures are an extreme step and all costs and benefits would be considered before taking a final decision.