India July inflation eases but rate hike likely
INDIA`S annual inflation slowed in July but remained near double digits making further interest rate hikes likely despite global economic uncertainty, economists said on Tuesday (August 16).
Inflation, according to the benchmark wholesale price index, slipped to 9.22 per cent in July from June`s 9.44 per cent mainly due to a fall in food prices while May`s inflation rate was revised up to 9.6 per cent from 9.1 per cent.
"We will get another rate hike when the central bank meets next month unless risks materialise of a very sharp global slowdown," he said.
The bank has raised rates 11 times in 18 months - the longest stretch of monetary tightening in a decade in a bid to tame inflation which is the fastest among major economies.
India`s economic growth has slowed under the brunt of the hikes as borrowing costs have surged for everything from consumer appliances to cars to plant equipment.
The government still forecasts growth of around 8.5 per cent but economists` projections are in the seven to eight per cent range below the 10 per cent level experts say is needed to cut India`s widespread chronic poverty.
The bank which last month raised its benchmark lending rate by a stronger than expected 50 basis points to a near three year high of 8.0 per cent has said that it is willing to sacrifice "some growth" to curb inflation.
Economists said that increasing fears about the global economy could mean the bank might hit the pause button at its policy meeting on September 16 but most were still betting on another rate increase.
"Notwithstanding growing concerns about the prospects for US and euro zone growth, a further rate hike still looks the most likely outcome," said Credit Suisse economist Robert Prior Wandesforde, who projected a quarter point rise.
Inflation is one of the biggest headaches for India`s Congress led government which is also battling a slew of corruption charges.
The price gains have heaped misery on India`s hundreds of millions of poor who are the Congress party`s main supporters.
Prime Minister Manmohan Singh said in a recent speech that the "country is passing through a phase of sustained high inflation," adding that "finding a solution to this problem will be our top-most priority."
Finance Minister Pranab Mukherjee said that he hoped that good monsoon rains would boost farm output and ease inflation but economists say most of the price gains stem from supply bottlenecks in the antiquated agricultural food chain.
Mukherjee added that he hoped it would be "possible to strike the right balance to achieve moderation of inflation and reasonable growth."
Some economists were betting the bank would opt for another half percentage point rise next month and then call a halt to its rate-hiking cycle.
"A 50 basis point rise makes transmission of the increase much more effective," said Rupa Rege Nitsure, chief economist at Bank of Baroda.
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