Reserve Bank of India
India reported a fall of $1.46 billion in its foreign exchange reserves for the week ended Feb. 19. Picture: Reserve Bank of India (RBI) logo pictured outside its head office in Mumbai, India.REUTERS

With inflation remaining on the uptrend for the past few months, the chances of additional policy rate cuts by the Reserve Bank of India (RBI) now look almost nil, according to a research firm.

The retail inflation rate rose sharply to 5.4% in November compared to 5% in the previous month due to a rise in food prices. Food inflation accelerated to 6.1% in the month on a yearly basis versus 5.3% in October.

"We think the window for further easing following the cumulative 125bp of rate cuts this year has now shut. The RBI kept interest rates on hold in its December meeting, and we are forecasting the repo rate to stay unchanged at 6.75% throughout 2016," said Capital Economics in a note.

"By contrast, the consensus is expecting further modest loosening next year," said the note.

Cheaper global crude oil prices failed to provide any comfort for consumer prices to ease in November, as "delays in the sowing of the rabi (winter) crop" had badly impacted food prices.

"Much like the wholesale price index (WPI) data released earlier today, the pick-up in CPI inflation was in large part due to a rise in food inflation, which was the result of delays in the sowing of the rabi (winter) crop amid unusually warm temperatures for this time of year," it said.

An increase in the both the inflation rates — retail and wholesale — is likely to reduce the scope for further lending rates by the RBI in the coming months, as the imminent interest rate hike in the US has already driven the central bank to keep rates unchanged at the December meeting.

Earlier, a slowing inflation rate, mainly on account of falling oil prices, enabled the RBI to cut repo rate by 125bps in 2015.

The recent salary hike of over 23% recommended by the Seventh Pay Commission to the government employees is expected to lead to an increase in inflation despite rising consumption.

"Public-sector pay increases on this scale may put upward pressure on wage settlements more generally, and feed into higher inflation," said Capital Economics.

Also read
Quick Links