The inflation reading for May has shown signs of easing, and economists believe that it being close to RBI's projection is good news. However, the US Federal Reserve is likely to hike rates in its policy on June 15, and the Indian central bank may have not much option but to react to it
The consumer price inflation (CPI) reading for May eased to 7.04 percent as against 7.79 percent in April. The marginal reduction has been on account of softening food prices, data released by the government showed on Monday.
This reading falls in line with the Reserve Bank of India (RBI) inflation projection which Shaktikanta Das made in its policy statement on June 8.
However, US Federal Reserve chair Jerome Powell is expected to raise rates in its policy on June 15, and economists believe that the RBI will have to react to that.
A report in the Wall Street Journal, written by the ‘Fed Whisperer’, said that the Fed might actually hike rates by 75 basis points (bps). The Fed raised rates by a half percentage point at its meeting last month, the first such increase since 2000.
Speaking to CNBC-TV18, Soumya Kanti Ghosh, the chief economist at the State Bank of India (SBI), lauded RBI's projection saying, "RBI has prepared us for inflation, and headline inflation could be closer to RBI’s target."
“My fear is that even though inflation in India has now eased off and it's of course on a trajectory, which could be as similar to what the RBI has projected or maybe lower than even the RBI has projected, RBI may have to intervene in the market and raise rates purely because of external consideration rather than domestic inflation considerations," he said.
B Prasanna of ICICI Bank agreed that inflation is better on sequential momentum in India.
“The momentum seems to have not even plateaued in the US, but the incremental month-on-month momentum might have peaked out as far as India is concerned,” Prasanna said.
Both the economists believe that the RBI would have to undertake rate hikes to support the rupee once the US Fed makes its move.
"Otherwise, the rupee could decline even though it is holding up today. I think once the rate hike comes through, once the hawkish commentary comes through tomorrow from the Fed, there could be more troubles from the emerging economies,” warned Ghosh.