India rates likely to stay on hold as inflation slows

India’s inflation slowed to its lowest level in three months in December as soaring vegetable prices eased, with the reading considered critical in helping to determine the central bank’s future interest-rate decisions.

The data is likely to increase the chances of the Reserve Bank of India (RBI) keeping rates on hold at the next monetary policy meeting this month, according to analysts.

It is also expected to be welcomed the ruling Congress party, with high inflation a major source of concern as it tries to win over voters ahead of a forthcoming general election in the country.

Consumer price index inflation declined to 9.87 per cent last month, compared with 11.16 per cent in November, according to provisional figures released by the government. Vegetable price inflation fell to 38.76 per cent last month, compared with more than 61 per cent in November. Overall food inflation stood at 12.16 per cent in December, down from 14.72 per cent a month earlier.

The rupee and stock markets rose yesterday ahead of the release of the data – published after the markets closed – in anticipation of a drop in inflation. The rupee was trading at 61.51 against the US dollar yesterday afternoon, compared with a close of 61.90 on Friday. The S&P BSE Sensex gained 1.81 per cent, ending the day at 21,134.21.

The RBI last month unexpectedly kept interest rates on hold. A 25-basis point increase in the key rate had been anticipated to help to curb stubbornly high inflation, partly because the central bank governor, Raghuram Rajan, who took up the role in September, had highlighted that keeping inflation in check was his main priority.

The central bank justified its decision last month by saying that indications of vegetable prices coming down meant it was worth waiting to see what happened “before determining the course of monetary policy”.

Inflation, which hits the poor hard, has hurt the Congress party. Onion prices tripled last year, helping to drive up inflation levels. Considered a dietary staple, onion prices have been credited with political parties losing elections in India in the past. A general election is expected by May.

Many restaurants and individuals reduced their use of onions as the cost of the vegetable rocketed. A drought caused by weak rainfall during the monsoon season in 2012 was largely to blame for poor supplies of crops, which led to a rise in prices. The monsoon season last year was much better, however, resulting in better yields of crops.

Leif Eskesen, HSBC’s chief economist for India and Asean, said inflation risks remained “tilted to the upside” – despite the expected easing of food inflation – and that rate rises would be needed to manage such risks. Others believe that the inflation data could pave the way for cuts.

“We believe if the inflation trajectory softens markedly in December 2013, the RBI may have room for a rate cut at a future date,” wrote Soumya Kanti Ghosh, the chief economic adviser to the economic research department at the State Bank of India, in a research note published just before the data was released.

“However, a rate cut is unlikely before March 2014, but only if the inflation numbers show a persistent declining trend.”

Factory output data released on Friday revealed a 2.1 per cent decline in November compared to the same month a year earlier, adding to the case against a rise in interest rates.

business@thenational.ae