Moneycontrol Bureau

Inflation rose to 7.55% in August as prices of potato, wheat and pulses as well as manufactured items soared. This is quite alarming, say experts, as it signals that though core inflation is steady, input cost pressure is building up.

In an interview to CNBC-TV18, Sonal Varma of Nomura India says that with the diesel price hike, there will more pressure on the input cost and may hamper food inflation in September. This, she warns, may even take inflation to 8% which is a very worrying sign for the central bank.

"Producers are facing higher cost pressures and to an extent they are able to pass it on and at the consumer level we have still not seen prices coming down. So on both the counts the conclusion is fairly clear that inflation underlying is very persistent," she explains.

Echoing a similar sentiment, Sajjid Chinoy, JPMorgan says commodities may rally even further after the Fed action and ECB action over the last week. "So input cost will be pressurised further. I think there will little respite for headline inflation in the coming months even without accounting for what happened on the fuel price increases yesterday," he adds.

How far will diesel price hike impact RBI's stance?

Experts feel that RBI has really no elbow room left to do anything on Monday. Verma is expecting inflation to head towards and above 8% in the coming months warranting a no rate cut this year.

"Banking system liquidity actually in our view is within comfort zone and if required RBI can do open market operations. So we are not expecting a cash reserve ratio cut at the September 17 meeting. Even in October given the inflationary pressures our view is it will not be really feasible for the RBI to cut rates," she elaborates.

Chinoy, too, agrees that the central bank is not going to have much room to maneuver in the next three-four months. Therefore, according to him, the mantel of lifting sentiment activity growth will have to fall on the government.

Bond markets

Manish Wadhawan, HSBC says that bond yield is likely to be still hovering between 8.10 to 8.25 yields for a reasonable period of time. He explains this is because on the bond side some kind of expenditure cuts expected.

"With a reasonable supply lined up I do not see bonds breaking any big range now in the next 15-20 days before by the end of the month, when we come to see the second half calendar. This is unless and until there is a negative surprise on that which can lead to another range that we are talking about. I think they should remain range bound for the next 15-20 days," he stresses.

Nasrin Sultana
nasrin.sultana@network18online.com