India’s Reserve Bank is unlikely to follow further monetary loosening in the near future as inflation is set to rise again amid signs of a rebound in economic activity, Shilan Shah, an economist at Capital Economics, said.
Headline inflation held steady at 3.3 percent in September, data from the Central Statistics Office showed on October 12.
In September, the slowdown in food inflation was offset by rises in both fuel price inflation and core inflation, the economist observed.
The headline inflation rate remained comfortably inside the Reserve Bank’s target range.
“But the further increase in the core inflation measure will be noted by policymakers,” Shah noted.
While food prices tend to be volatile, it seems more likely than not that core inflation will rise further, he said.
Capacity utilization rates are tightening in the economy and there is a risk that excessive liquidity in the banking sector could seep into inflation – the RBI has had to increase its open market sales over the past two months, Shah said.
Besides this, a loosening of fiscal policy in the form of the loan waivers announced by various state governments in recent months could also add to price pressures, the economist added.
Capital Economics expects core price pressures to continue to build. While the interest rate hikes are still some way off, Shah said, the likelihood of further easing has diminished.
The statistical office also released industrial production figures for the month of August.
The industrial production index surprisingly grew 4.9 percent annually in August after a 0.9 percent rise in July.
“As always, we suggest treating the IP data with a degree of caution and they are volatile,” the economist pointed out.
But at face value, the data suggest that the disruption to industry from the implementation of the GST on 1st July was short-lived.
“Bringing all of this together, with inflation set to rise further and signs of a rebound in economic activity, we remain of the view that monetary policy will remain on hold for a prolonged period,” Shah predicted.
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