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Inflation rising, tough to expect a rate cut from RBI


Mumbai: After the release of data suggesting an acceleration in inflation for July, analysts today said it is very tough to expect a rate cut from the RBI any time soon.

“Tight monetary policy that re-anchors household inflation expectations remains critical to RBI’s disinflationary strategy, suggesting there is no scope for policy easing by RBI,” analysts at brokerage BNP Paribas said.

HSBC said data flow like the one yesterday, where the consumer price inflation climbed up to 7.96 per cent, coupled with a fall in the factory output growth below the expectations, will make RBI “cautious about cutting rates”.

The industrial output growth slowed down to 3.4 per cent in June, after rising 5 per cent in May.

HSBC added that US Fed’s expected rate hikes also limits RBI’s room for cutting rates.

The RBI had held its key rates in its last week’s policy announcement and indicated “upside pressures” to its targets on cooling inflation, leading many analysts to believe that a rate cut is a distant event.

The RBI wants to maintain the number at 8 per cent by January 2015, but is targeting to take it down further to 6 per cent by January 2016.

In the note, HSBC said, “next year’s target of 6 per cent will be more difficult to achieve if growth strengthens too quickly.”

On food inflation, which was one of the biggest factors for the climb up in CPI inflation in July, HSBC said the pick up in monsoons can result in some help.

“Output in the agricultural sector could catch-up from dismal sowing patterns seen during the initial phase of the monsoon season. The rise in food inflation could, therefore, prove transitory,” it said.

Apart from that, it flagged the risk posed by a rise in crude prices to the inflation situation, and specifically cited the rising geo-political tensions in the middle east.


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