Where do bankers see inflation heading?

Inflation for the week-ended April 12 has come in at 7.33% as against 7.14%. However, stocks markets seem to have ignored the higher inflation number with the Sensex crossing the 17,000 mark in intra-day trade on the last trading session of the week.

However, this is way beyond the Reserve Bank of India's comfort zone of under 5%. The central bank is going to be announcing its Credit Policy on April 29, so what steps can be expected from it with regards to inflation?

Saugata Bhattacharya, Economist, Axis Bank, is expecting an increase in the Liquidity Adjustment Facility, or LAF, and repo rates. “However, my call is the reverse repo rates because that is a little less binding and biting on the system than the repo rate. There aren’t a whole lot of reasons now to increase rates at this point in time. But I do expect a 50 bps hike in the reverse repo rate, which is likely to help banks on the one side and it is not likely to be as binding as a hike in the repo rate.”

However, Sucheta Mehta, Economist, Standard Chartered Bank, said RBI should pause and stay on hold for a while. He feels RBI needs to be extremely hawkish going forward. “There is no reason to undermine inflation. Perhaps we can remain on hold for a while, watch the situation and take necessary steps as and when necessary. But for now, we can stay on hold perhaps.”

Arun Kaul, GM-Treasury Finance, PNB, said the government’s fiscal side steps could see inflation pressure going down. “We must not ignore the fact that liquidity is very comfortable in the system, which could exert further inflationary pressures. Whatever steps have been taken on the fiscal side has started giving more results. We could see more results coming up later on and could see inflation pressure going down. But the market does expect RBI to increase repo rate.”

But where do bankers see inflation heading?

Bhattacharya feels the Wholesale Price Index will keep on increasing at a steady level probably for sometime before it starts diminishing slowly. “Unfortunately, the inflation rate is likely to remain pretty high because of the base effect of last year’s inflation. Last year’s inflation rates were coming down significantly and that is likely to keep inflation rates high. But on the other hand, increases in the WPI index is likely to moderate. It is likely to start falling after the next two-three weeks. Once we see the Federal Reserve’s rate hikes or holding of policy rates, you are also likely to see a reduction in the commodity prices that you see globally. That should also help inflation because after this the dollar is likely to start rising against other major currencies, which is the euro and yen.”

Mehta, who feels inflation will nudge higher in the coming couple of months or so and stay above RBIs tolerance band for most of 2008-09, also shares this view. “The good news is that inflation has now started falling back within the expectations band. There is still some strength within the system. We are already beginning to see some second round impact of the previous inflation figures and things such as talks of car, cement, tyre prices etc going up. Also, FMCG would be slightly costlier. All this could mean that inflation could remain high in the coming few months to be.”