Nomura says slowing rural wages should bring inflation down | business | Hindustan Times
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Nomura says slowing rural wages should bring inflation down

business Updated: Oct 26, 2013 11:10 IST

Japanese brokerage firm Nomura on Friday said with real rural wages moderating, both rural demand and inflationary pressures will moderate in the medium-term, giving the much-needed room to the Reserve Bank to lower interest rates.

"Though rural wages continue to rise, the pace of growth is moderating. Growth in the average daily wage rate for agricultural labourers dipped to 13.1% in August year- on-year, which is significantly slower than 18.5 % in 2012 and 23.4 % in 2011," Nomura said in a research note today.

After adjusting for inflation, the decline is even more stark: real rural wage growth moderated to -0.1% in August y-o-y from 9.3% in 2012 and 13.4% the year before, Noumra India Chief Economist Sonal Varma said in the note.

"A moderation in real rural wages should cause rural demand to moderate, apart from moderating the medium-term inflationary pressures, as the cost of production wages eases," she said.

Several factors, including the government's employment guarantee scheme and indexing rural wages to consumer price inflation, have boosted rural wage growth and shifted the terms of trade in favour of the rural sector, she said, adding however, the slowdown in urban areas is now starting to feed through into slower rural wage growth.

It can be noted that over the last few years, rising real rural wages have both supported rural demand and increased the cost of production, making inflation sticky.

Wholesale inflation number rose to a seven month high of 6.46% on a pass through of the rupee depreciation, in September, while consumer price inflation for the month quickened to 9.85%.

The Reserve Bank has been repeatedly stating the high rates is one of the reasons leading to the slowdown in the economic activity, justifying its stance saying the high rates is for the benefit of maintaining the growth figure in the long term.

Reserve Bank governor Raghuram Rajan surprised everyone in his first policy review on September 20 by increasing the repo rate by 0.25% on pressures emanating on the inflation front.