ANOTHER RATE HIKE ON CARDS?

Is RBI thinking of raising Short term lending rates again...Answer is affermative... Reserve Bank Governor Duvvuri Subbarao hinted so... We will take into account the inflation numbers while framing policy told reporters after meeting Finance Minister P Chidambaram and other senior officials. Headline Inflation in June rose to 4.86 per cent loosing its four months of declining trend. It was 4.7 in May 2013. Kitchen Items like onion, rice and other cereals prices added woes to the inflation...The central bank is scheduled to announce the first quarter monetary policy review on July 30 amid industry demand of reduction in interest rate to boost sagging growth.

"I have come to discuss the G20 issues with the Finance Minister," he said. The meeting lasted for over an hour.Chidambaram is scheduled to participate in the G20 meeting of finance ministers and central bank governors to be held in Moscow on July 19 and 20.
Subbarao later had a separate meeting with Department of Economic Affairs Secretary Arvind Mayaram, Chief Economic Advisor Raghuram Rajan and newly appointed Additional Secretary K P Krishnan.

Subbarao is also believed to have discussed the declining rupee and macro economic situation with Finance Ministry functionaries.

INFLATION @ 4.86%

Snapping declining trend of four months, inflation rose to 4.86 per cent in June as kitchen items like onion, rice and other cereals became costlier, adding to the woes of the government struggling to arrest the falling value of rupee that is putting pressure on prices. Rising inflation will also have a bearing on the Reserve Bank's first quarter monetary policy review on July 30.
Inflation based on the Wholesale Price Index (WPI) had stood at 4.70 per cent in May. Food inflation rose to 9.74 per cent, driven by price rise in onion, cereals and rice in June, against 8.25 per cent in the previous month, as per the Industry Ministry data. Vegetable prices went up by 16.47 per cent from 4.85 per cent in May. Inflation in onion shot up by 114 per cent in June as against 97.40 per cent in May. Inflation in the manufactured items category, however, declined to 2.75 per cent in June from 3.11 per cent in May. Chairman of Prime Minister's Economic Advisory Council C Rangarajan expressed apprehension that rupee depreciation could have bearing on the price situation. "Even though inflation has risen a little bit, WPI seems to be stablising...(but) going ahead there will be impact of rupee depreciation (on prices)," he said.
On the possibility of interest rate cut by RBI in its forthcoming policy, Rangarajan said: "RBI faces the difficult choice of controlling inflation, growth needs stimulus, but external situation remains a concern. RBI will take all these three factors into account." The value of the rupee, which touched all time low of 61.21 to a dollar earlier this month, is fuelling inflation, especially in the prices of petroleum products. Government as well as the RBI have been taking steps to strengthen rupee.
The Consumer Price Index (CPI) based retail inflation for June too had also inched up marginally. As per the WPI data, non-food articles category which includes fibre, oil seeds and minerals, saw a sharp rise in inflation to 7.57 per cent, from 4.88 per cent in May. Meanwhile, inflation for April has been revised downwards to 4.77 per cent from 4.89 per cent. Inflation in egg, meat and fish was 12.23 per cent during June as compared to 11.21 per cent in May. Price rise in cereals and rice was high at 17.18 and 19.11 per cent. Potatoes, however, saw decline in rate of price rise to (-)14.22 per cent, from (-)3.44 per cent in May. Pulses too declined sharply to 1.59 per cent during June, from 5.95 per cent in May.

Rupa Rege Nitsure, chief economist of Bank of Baroda opined that the June WPI does not appropriately factor in the impact of recent adjustments in administered fuel prices and rupee depreciation. "There will be an upward revision in this number, going forward," she added.
For the fuel and power basket, inflation was lower at 7.12 per cent in June as compared to 7.32 per cent in May.

RBI MAY TAKE HARD STEP

The marginal rise in June headline inflation to 4.9 per cent may be a precursor to a pronounced increase in the coming months and RBI is unlikely to cut rates at the forthcoming policy meet on July 30, say analysts. "The weakening rupee is offsetting the gains from low global commodity and crude prices...No action from the RBI may be the best action in this situation. Expect no rate cut on July 30," ratings agency Crisil said in a note today.
It said even though crude prices have fallen 20 per cent in dollar terms from the peak of 2009, in rupee terms, the prices are almost at the 2009 due to the steep currency depreciation.
Economists at brokerage firm Credit Suisse even went to the extent of saying that there in fact is a case for a rate hike and not any cuts by from RBI on July 30. "The chance of the RBI cutting interest rates at its next meeting on July 30 is close to zero. In fact, there is probably a higher risk of rate hikes than cuts right now." Crisil said it is increasing its FY14 average inflation estimate up to 6 per cent from the earlier 5.3 per cent, as against the RBI's stated comfort level of 5 per cent. Credit Suisse said every 10 percentage points depreciation in the rupee leads to a 1 percentage point spike in headline inflation. Official data released this morning said June wholesale price inflation rose to 4.86 per cent, driven mainly by rising prices of food articles, especially vegetables including onion which jumped nearly 120 per cent. "We expect headline inflation to inch higher in the coming months due to higher raw material costs, reflecting the sharp currency depreciation in the last two months, and pass-through of administered fuel prices," a note from the Japanese brokerage firm Nomura said. It said till the consumer price based inflation, which rose to 9.87 per cent for June, comes down, RBI will not take any action on the rate front.

Commenting on the decline in core inflation to 2 per cent, the 11th consecutive monthly fall in the number, Credit Suisse said it reflects the weakening industrial activity, softer money and lending growth in the economy. However, Deutsche Bank in a report played down the marginal uptick in the inflation readings and described them as benign numbers as prices of manufactured goods which make up for 65 per cent of the inflation basket. "As food prices stabilise due to a normal monsoons and good harvest, we expect inflation to head lower once again and settle in the 4-4.5 per cent range by September. "Even though we feel that the forex pass-through to inflation will probably not allow headline inflation to fall below 4-4.5 per cent in this cycle, the dynamic would be sufficient to allow RBI to consider cutting rates in September," the report said even as it remained silent on July 30 policy.