A slower growth rate and rising inflation in the economy has raised the clamour for an increase in the key policy rate among market players.

While India’s factory output contracted for the first time in four months in October, retail inflation rose to its highest level since January 2012. October industrial production declined 1.8 per cent year-on-year, taking the year-to-date growth to nil. Moreover, manufacturing output, which constitutes over 75 per cent of the index, dropped 2 per cent.

Adding to concerns, the November CPI (consumer price index) inflation jumped to 11.24 per cent, due largely to a 14.5 per cent rise in food and vegetable prices. Despite the food component driving inflation to a greater extent, RBI is likely to find it difficult to ignore the double-digit inflation.

Radhika Rao, Economist at DBS Bank, said, “Despite the negative output gap, inflation remains stubbornly high...With a clear intention to anchor inflationary expectations, the RBI is likely to undertake a follow-up 25 bps (basis points) rate hike in the mid-December review.”

Earlier this week, RBI Governor Raghuram Rajan reiterated his stance that the central bank is not comfortable with the current level of inflation and would carefully calibrate its monetary policy.

The RBI is due to announce its mid-quarter review of monetary policy for 2013-14 on December 18. It has raised the key interest rate or the repo rate twice since September.  The repo rate is the effective policy rate that decides lending rates in the economy.

At present the repo rate stands at 7.75 per cent.

“While WPI inflation data due on Monday would also influence RBI’s decision, the probability of a rate hike in December post-today’s CPI inflation has increased,” said Shubhada Rao, Chief Economist, Yes Bank, in a report.

However, a positive aspect in the economy was the trade data that imports fell by 5.4 per cent and trade deficit fell by 22.9 per cent in the April-November 2013 period. Exports grew (though slower) by 6.3 per cent.

According to Rao, while there is some visibility in terms of growth outlook, the interpretation of CPI data has become complex when seen in the light of moderating core inflation, contracting industrial activity, and entrenched food price pressures.

 

Beena.parmar@thehindu.co.in

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