RBI Likely to Tighten Policy Rates to Curb Inflation, says HSBC - The New Indian Express

RBI Likely to Tighten Policy Rates to Curb Inflation, says HSBC

Published: 18th April 2014 06:00 AM

Last Updated: 18th April 2014 08:39 AM

The Reserve Bank of India is likely to remain the status quo for now, but will eventually have to tighten policy rates to contain upside risks to inflation, said HSBC.

"The RBI may eventually respond by tightening policy rates further to contain upside risks to prices and to bring inflation to 6 per cent or below by early 2016 if it sticks to the Patel Committee's recommended glide path," HSBC said.

It added that the inflation may remain sticky, with a possible El Nino effect on the monsoon likely to push up food prices and geopolitical uncertainties seen pumping up global commodity rates.

"A dry spell this year due to El Nino could spur food inflation. The last time we had poor weather following El Nino was in 2009 and food inflation averaged 14 per cent then," HSBC said.

El Nino refers to the warmer-than-average sea surface temperature in the central and eastern tropical Pacific Ocean. This condition occurs every 4-12 years and had last impacted India's monsoon in 2009, leading to the worst drought in almost four decades.

The RBI's target is to ease retail inflation, as measured by the Consumer Price Index, to 8 per cent by January, 2015 and 6 per cent by January, 2016. The RBI had increased the key policy repo rate three times since September.

Both retail and wholesale price inflation accelerated in March due to rising food prices. While WPIO rose to a 3-month high of 5.7 per cent, retail inflation inched up to 8.31 per cent, after softening for three straight months sinch December.

If food inflation goes back to these levels from 9 per cent presently, it could potentially add up to 2.5 percentage points to headline CPI.

The monthly 50 paise increase in diesel prices is set to continue for another year or so, provided international oil prices and the exchange rate are unchanged and the new government does not change fuel price policies. This will continue to add to costs and inflation pressures.

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