Neelkanth Mishra, Chief Economist, Axis Bank, believes the pangs of inflation are short term in nature and the Reserve Bank of India’s Monetary Policy Committee will keep rates on hold for a while.
There has been raging debate over management of inflation in India that shot up in July led by cereal and vegetable prices. It rose above RBI’s target range of 2-6 percent to hit a 15-month high of 7.44 percent.
“The MPC is now targeting 4 percent plus minus 2. There was a belief that the moment inflation gets below 4 percent, MPC will cut rates – that was the wrong expectation to start with. Therefore, I think rates will stay on hold,” said Mishra, speaking to CNBC TV-18. .
The sharp rise in inflation was driven by higher prices for vegetables, with their index rising 38 percent month-on-month, resulting in a 6.7 percent sequential rise in Consumer Food Price Index and a 2.9 percent increase in the overall CPI.
However, prices of some vegetables, especially tomatoes, have come down since then and now it is available at a third of its peak price in July. On the other hand, some vegetables, such as onions, have become dearer.
There was some more good news on the core inflation front, which eased slightly to 4.9 percent in July from 5.1 percent in June. Mishra also said one should focus on this number.
“From India's inflation report, the core inflation numbers were better and that we need to focus on,” said Mishra.
Also Read: NCCF, NAFED to sell tomatoes at Rs 40 per kg from August 20
For the RBI's revised forecast of 6.2 percent for July-September to be met, CPI inflation should average 5.6 percent in August and September. This looks unlikely at the moment, with economists seeing inflation remaining elevated around 6.5 percent in August - data for which will be released on September 12 - given the price developments so far.
Thus, expectations of a rate cut have also vanished.
“This expectation many had that interest rates will start falling early next calendar year, I think that was totally misplaced. Thankfully that expectation is now getting corrected. The fear that this will again necessitate another round of rate hikes is not something I buy into,” said Mishra.
Not a big impact on financial cos
Mishra believes the high inflation, and consistently high rates, will not be a big issue for lenders such as non banking financial companies (NBFCs) and banks.
“The longer rates stay on hold, the higher the effective rates are. So, if repo rates stay unchanged for a year, there will be effective tightening,” said Mishra. “I think financial (companies) will do pretty well.”
Also Read: Banks to maintain 10% incremental CRR from August 12, says RBI governor
He also refused to read too much into the imposition of 10 percent incremental CRR (cash reserve ratio), which is likely to suck liquidity out of the system. Mishra said the move was “more tactical”.
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