Despite industrial production shrinking, bankers feel that RBI governor Raghuram Rajan will have little choice but to express discomfort with rising prices. Both the equity and foreign exchange markets, which began with a rally in the wake of state-election results, ended the week quite subdued due to bad news on growth and inflation. The index for industrial production declined by 1.8% in October and the consumer price index jumped to 11.24% in November.
"While October IIP growth at -1.8% was in line with our expectations of -1.5%, the significant shock was from retail inflation at 11.24% against our expectation of 10%. Food inflation failed to show any respite and vegetables index continues to exhibit steady increase. Even as the comfort comes from a drop in core inflation, RBI should remain concerned on the overall inflation expectations in the economy. Hence, we maintain our call for a 25 bps hike in repo rate to 8% on December 18," said Indranil Pan, chief economist, Kotak Mahindra Bank.
According to HDFC Securities, the November inflation numbers are beyond the wildest fears of RBI. "The data puts the RBI into a dilemma, quite similar to the one faced by doctors where they can't administer a strong antibiotic because of the frail health of the patient, but if they don't, the ailment will kill. While the inflation can come possibly come down in the winter months, it increases the chances of a rate hike by the RBI at its ensuing meeting next week," RBI said in a report.Bankers had earlier expressed hope that following a good monsoon, food prices would start moving downward in the second half. However, belying all expectations food prices continue to be stubbornly high. According to State Bank of India, the fact that core CPI has edged down in November 2013 implies that the increase in CPI is entirely food driven .
Besides not having an impact on prices, the monsoon does not appear to have had any impact on consumption as well. "A revival in consumer demand, which was expected from September onwards as it coincides with the harvest cum festival season, hasn't happened yet. It does appear that households have not started spending and while there is still hope that they would in November (data awaited), there is a cloud of uncertainty," said Madan Sabnavis, chief economist, Care Ratings. He adds that with demand for gold coming down in October and November, it can be expected that consumer spending would increase, notwithstanding erosion of spending power on account of higher food inflation.
Although it has been argued that food prices are a supply-side problem and that monetary policy cannot tackle food prices, RBI has consistently held the view that if food prices remain high for long inflation spreads to other components through wages.
"Given the adverse effects of such a trajectory on inflation expectations and wages, RBI will have little choice but to signal its discomfort. Accordingly, we expect RBI to hike the repo rate by 25 bps in the December review," said A Prasanna of ICICI Securities Primary Dealership.
via Business - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNFCxN36GbsVkBb86jMh34PuNCfBEQ&url=http://timesofindia.indiatimes.com/business/india-business/Banks-likely-to-raise-lending-rates/articleshow/27443259.cms
Put the internet to work for you.
0 comments:
Post a Comment