The tacit agenda of the Rajan-led RBI remains to normalise real deposit rates and boost financial saving, says BNP Paribas
Like its CPI (consumer price index) cousin, the WPI (wholesale price index) data chalked up an awful reading, with factory gate inflation accelerating to an 8-month high in October 2013. The pick-up to 7.0% year-on-year from 6.5% in September 2013 was a tad stronger than both our and market expectations as per the Bloomberg survey, echoing the CPI data released earlier this week in suggesting India’s dynamics are getting worse, not better. These observations are made by BNP Paribas in its research note.
Volatile primary food price inflation remained rapid, running at 18.2%. However it was indeed down marginally from September’s 18.4% year-on-year rate. Leading the move lower were fruit and vegetable prices, as there appear tentative signs of the surge in onion prices levelling off. This is in part due to the drought in Maharashtra and heavy rains in other growing areas. Fruit and vegetable price inflation moderated to 45.6% year-on-year after reaching an almost 15-year high of 49.1% year-on-year in September 2013 reflecting two consecutive months of month-on-month declines, once the data are seasonally adjusted, points out BNP Paribas.
According to BNP Paribas, it was electricity and core inflation that led the move higher as the lingering impact of currency deprecation over the summer appears to be taking a toll on the latter.
The inflation trend can be studied in the following chart:
Commenting on RBI (Reserve Bank of India) policy, the research note argues that RBI governor Dr Rajan is showing welcome signs of a hard-line approach to inflation control by prioritising CPI, rather than WPI. With CPI inflation in low teen territory, today’s WPI data, if anything, just cements the case that Dr Rajan will deliver his third repo rate hike in as many as meetings as governor at the December meeting.
The research note concludes by saying, “the tacit agenda of the Rajan-led RBI remains to normalise real deposit rates and boost financial saving.” It is important that RBI ensures its monetary policy is sufficiently tight to re-anchor inflation expectations.