NEW DELHI (Reuters): India’s headline inflation eased in July, but persistent price pressures in manufactured goods raised the odds that policy will have to stay tight in the economy despite the rising risks to growth.
The high inflation print still have most economists betting that India’s central bank will have to extend what has been an aggressive 18-month policy tightening spree.
But a slew of weak data on consumer spending and bank credit coupled with the heightened possibility of a slump in the developed world could upset those odds.
The Reserve Bank of India (RBI) has raised rates 11 times since March 2010 to combat high inflation, which is seen as dragging down growth from the government’s projection of 8.5 percent for the current fiscal that ends in March 2012.
RBI Governor Duvvuri Subbarao acknowledged those risks last Friday, but said it was crucial that inflation and inflationary expectations be brought down in Asia’s third-largest economy — a clear indication that the central bank may continue to raise rates at its policy review next month.
“With inflation over 9 percent and growth above 8 percent, the current situation indicates that the central bank will most likely hike rates by 25 basis points on Sept. 16,” said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai.
“Any turn in monetary policy after that will be decided based on actual trajectory of growth and inflation,” Rathi said.
The benchmark 7.80 percent 2021 bond yield fell 1 basis point after the data to 8.32 percent, while the 30-share main share index remained unchanged.
The 5-year overnight indexed swap rates was steady at 6.91 percent and the 1-year was also unchanged at 7.80 percent, dealers said.
The wholesale price index, India’s main inflation gauge rose 9.22 percent in July, almost in line with the median forecast for a 9.20 percent rise in a Reuters poll.
Manufacturing inflation quickened to 7.49 percent in July from 7.43 percent in the previous month, adding to fears that inflation is deeply entrenched in the economy as manufacturers still retain some pricing power.