India’s Accelerating Inflation Leaves Little Room For Further Loosening

The Reserve Bank of India is unlikely to follow up with further policy loosening in the near future amid an acceleration in inflation that may continue in the coming months, Shilan Shah, an economist at Capital Economics, said.

India’s consumer price inflation accelerated for the first time in four months in July, to 2.4 percent from 1.5 percent in June, data from the Central Statistics Office showed on August 14.

The spike was driven by higher prices of vegetable prices that led to a sharp pick-up in food inflation from -1.2 percent to 0.4 percent.

CPI inflation is comfortably within the RBI’s target range of 4±2 percent, but there are reasons to think that the rise in inflation has further to run, Shah said.

Food inflation is likely to pick up further due to unfavorable base effects, the economist said.

Core inflation is also likely to accelerate in the coming months, as relatively high capacity utilization rates should boost price pressures, Shah reckoned.

Besides this, there is also a risk that excessive liquidity in the banking sector could seep into inflation, the economist pointed out.

The fiscal outlook is also a cause for concern in the coming months, Shah said, adding that the direct inflationary impact resulting from the recently-implemented Goods and Services Tax (GST) is likely to be limited.

This is because food products, which form nearly half of the CPI basket, are exempt from the GST.

The recent farmer loan waivers announced by various state governments, which are likely to put their fiscal positions under more pressure, Shah said.

“The RBI made reference to this in its latest policy statement, noting that “implementation of farm loan waivers by states may result in possible fiscal slippages… entailing inflationary spillovers.”

Capital Economics anticipates the consolidated fiscal deficit to widen over the coming couple of years.

“In all, inflation looks set to accelerate further over the coming months,” the economist predicted.

“As such, while the RBI cut interest rates in early August, we don’t think that it will be followed up with further policy loosening. ”

by RTT Staff Writer

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