If you have been putting off a planned purchase of a house or a car waiting for interest rates to fall further, think again as rising prices will limit the room for more rate cuts.
India’s wholesale inflation rate galloped towards a worrisome 7.23% in April from 6.89% in March amid fears that rain-induced supply constraints and a possible increase in fuel prices will further knock up prices of food and other items.
Besides, a falling rupee, which closed at an all-time low of 53.97 to a dollar on Monday is likely to push up prices of most imported goods, including crude oil, fanning inflation.
At 10.49% in April, food inflation has already reached uncomfortable levels, prompting calls for better infrastructure and reforms to bolster supplies.
“Food inflation is a matter of concern, particularly since it has reached the double digit,” said Pranab Mukherjee, finance minister. “Food inflation can be tackled by creating storing facilities and cold chains. Also required are institutional reforms in agricultural marketing.”
Higher inflation, in turn, may stall any further moves by the Reserve Bank of India (RBI) to cut interest rates.
“The inflation numbers are a very uncomfortable statistics,” said C Rangarajan, chairman, Prime Minister’s Economic Advisory Council. “Many people have been calling for an easing in the monetary policy, but the recent rise in inflation makes it difficult for the RBI to moderate policy.”
An increase in retail prices of petrol and diesel are also widely expected after Parliament's budget session gets over next month — a move that will raise prices of most goods because of higher cost of ferrying them across locations.
In the continuing tug-of-war between rising prices and sliding growth, the RBI last month slashed the repo rate — its main lending rate — for the first time in nearly three years. The RBI had slashed the repo rate or the rate at which banks borrow from the central bank by 0.50 percentage points to 8%.
India's factory output also contracted by (-)3.5% in March, the lowest in five months. Sluggish industrial growth means lesser job opportunities and smaller pay hikes as corporations stall investment plans, slow down hiring and prune wage bills. “The April inflation outcome is a timely reminder for not being excessively optimistic about India's inflation outlook,” said Rajeev Malik, senior economist at CLSA.