Indian Prices May Drop for Months Before Surging, Analysts Say
India’s inflation is likely to stay in “negative territory” for several months before surging above the central bank’s target early next year, economists say.
The benchmark wholesale-price index fell 1.61 percent in the week to June 6 from a year earlier, the first decline since December 1978. Accelerating inflation later this year and into 2010 will compel the Reserve Bank of India to maintain a “cautious stance” on monetary policy, said Angus To, an economist at BNP Paribas SA in Hong Kong.
“Deflation in wholesale prices should offer scope for the RBI to cut interest rates again in order to offer additional stimulus to the economy,” said To. “However, the stubbornly high food prices will keep the central bank on a more cautious stance, preventing any aggressive action.”
Central bank Governor Duvvuri Subbarao slashed interest rates to record lows since October to help shield India from the worst global recession since the Great Depression. Signs that Asia’s third-largest economy is now recovering prompted Subbarao last month to suggest it might be time to start thinking about reversing “expansionary” policies.
“The Reserve Bank is close to the end of its easing cycle,” said Rohini Malkani, an economist at Citigroup Inc. in Mumbai. “At best one can expect a 25 basis point cut before it starts hiking rates in the second quarter of 2010.”
Other analysts say the central bank’s cycle of interest- rate cuts has already ended and that Subbarao’s next move will be to increase borrowing costs. The governor and his Reserve Bank colleagues next meet to set policy in Mumbai in late July.
Rates to Rise
Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai, expects Subbarao to start raising interest rates in early 2010 as inflation climbs to 6.5 percent. Sailesh Jha, senior regional economist at Barclays Plc in Singapore, predicts a half-point increase in the benchmark reverse repurchase rate to 3.75 percent in the fourth quarter of this year.
India’s inflation has eased from a 16-year high of 12.91 percent in August last year. The central bank last cut its reverse repurchase rate by a quarter-point to 3.25 percent on April 21.
Wholesale prices won’t decline for more than a few months and any decline would only have “statistical significance,” the governor has said.
“Negative inflation should be viewed more as an arithmetic phenomenon and not as deflation or a collapse in demand,” said Atsi Sheth, chief economist at Reliance Equities International Pvt. in Mumbai. “Once the base effect wears off post-September, inflation will likely rise cash advance.”
Double-Digits
Reliance Equities says wholesale inflation may reach 6 percent by March 2010.
Easing monetary conditions around the world and rising oil and commodity prices “may significantly push inflation beyond the current expectation over the next nine to 12 months,” said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. Edelweiss sees inflation reaching 6 percent to 7 percent by March 2010 and predicts wholesale prices could post double- digit growth in the fiscal year starting April 2010.
Gains in Indian consumer prices are already a “concern,” said To from BNP Paribas, who noted that the cost of food products rose 12.46 percent in the week to June 6 from a year earlier, accelerating from 12.36 percent in the previous week.
India has four consumer price indices and uses the wholesale price index as the benchmark measure.
Consumer Prices
The Reserve Bank of India looks at these other inflation gauges besides the wholesale price index when deciding its monetary stance, according to Governor Subbarao.
Consumer prices paid by industrial workers rose 8.7 percent in April from a year earlier, after gaining 8.3 percent the previous month.
Government spending measures may also stoke prices this year and next. The central bank estimates that three stimulus packages already announced, along with six interest-rate cuts in seven months, will provide a combined stimulus worth about 7 percent of gross domestic product to the economy.
Finance Minister Pranab Mukherjee has indicated even more will be spent on roads, ports and a rural jobs program to accelerate economic expansion in the budget due for release in New Delhi on July 6.
India’s economy is already beginning to show signs that it may be emerging from the global slump.
Industrial production unexpectedly rose in April, increasing 1.4 percent from a year earlier, according to figures released by the statistics bureau on June 12. Economists were expecting a 0.1 percent contraction.
The $1.2 trillion economy grew 5.8 percent last quarter from a year earlier, which matched the pace of the previous quarter and beat the 5 percent median forecast of economists surveyed by Bloomberg News.
Still, raising interest rates in India or elsewhere too soon could choke economic recovery, said Sanyal from Edelweiss.
“Premature monetary tightening may increase the risk of a prolonged slowdown, while delayed tightening could increase future inflation pressure,” Sanyal said.
Filed under: business by Fred