At his last monetary policy review on August 9, central bank chief Raghuram Rajan left key interest rates unchanged, flagging upside risks to the inflation target.
Soaring food prices in July probably kept headline inflation above the Reserve Bank of India’s (RBI) near-term target, underscoring the challenge facing the next central bank governor.
Consumer prices are expected to have risen 5.90 per cent last month from a year ago, faster than a 5.77 per cent provisional gain in June, according to a Reuters poll of economists.
If August 12 government data lines up with the forecast, July will be the fourth straight reading that tops the RBI’s target of 5 percent by March 2017.
At his last monetary policy review on August 9, RBI Governor Raghuram Rajan left key interest rates unchanged, flagging upside risks to the inflation target.
The former International Monetary Fund chief economist is due to step down as RBI governor on Sept. 4, after a three-year term, to return to academia.
While Prime Minister Narendra Modi’s government has yet to pick a successor, it has bound the next governor with Rajan’s retail inflation target of 4 per cent with a plus or minus 2 per cent band for next five years.
Above-average monsoon rains this summer have raised hopes of a boost to farm output and an ensuing drop in food inflation. Already, there are early signs that prices for vegetables are edging down.
However, the outlook for core inflation remains uncertain due to a shrinking output gap and an expected pickup in demand-driven price pressures following full implementation of a major hike in government salaries and pensions.
“The central bank faces a difficult task in meeting its inflation targets,” said Shilan Shah, India economist at Capital Economics.
Sales-Tax Impact Seen
The roll-out of a sales tax planned for next April is also expected to push up inflation. A government-appointed panel has suggested a standard goods and services tax rate of 17-18 per cent but India’s states want a higher level.
Morgan Stanley reckons a higher rate could push up retail inflation by as much as 0.70 percentage points.
Economists don’t see much steam left in the RBI’s current easing cycle, in which the policy repo rate has come down by 150 basis points since January 2015, to its lowest in more than five years.
Most expect another cut of 25 basis points by December, before the central bank hits the pause button. But much will depend on who replaces Rajan.
“The appointment of a more dovish candidate as the next governor would raise the chances of further monetary loosening,” Shah said.
India’s statistics office will release retail inflation data and industrial production data at 1200 GMT on Friday.
Analysts surveyed by Reuters expect output at factories, mines and utilities to expand 1.5 per cent in June from a year earlier. In May, contrary to a predicted contraction, output rose 1.2 per cent.
The industrial output data are based on an old series not reflected in India’s current gross domestic product figures. As a result, analysts set little store by those numbers as a guide to the economy’s broader health.