The rising cost of services offered by stylists to security guards is a new challenge for India’s monetary policy makers, who are ready to resume interest rate cuts as soon as the increase in inflation driven by food prices.
Services inflation rose to 4.8% in September from a year earlier, compared with 4.4% in February before the coronavirus outbreak, according to estimates by Citigroup Inc.The rally reflects cost-increasing factors associated with the pandemic, such as the social distancing and client screening, as well as fewer workers in urban centers after migrating back home during the national shutdown.
“While the increase is not much, the directional movement is quite counterintuitive, as services inflation is mostly synchronous with the demand cycle,” wrote Samiran Chakraborty, India’s chief economist at Citi, in a report last week.
That complicates the inflation outlook for the central bank, which forecasts overall consumer price growth to slow to 5.4% in the three months through December from around 7% last quarter. While the estimate is largely based on food prices coming out of the boil and supply chains reestablishing, recent trends show that vegetable prices have remained stubbornly high and supply lines are yet to be met. have repaired.
A spike in inflation was the main reason the central bank halted its easing policy after delivering 115 basis points of rate cuts this year. However, the Monetary Policy Committee decided to view the current hump in inflation as transitory and maintained an accommodative stance this month to support an economy heading towards its worst annual contraction.
“Unprecedented inflation rate” is how Sanjiv Mehta, president and managing director of Unilever Plc’s local unit, described the cost of raw materials for personal care products and the manufacturer of processed foods. “We believe that inflation in select categories will likely continue in the near term,” he said Tuesday.
Clues on whether harsh price pressures could keep policymakers on hiatus longer will be available when the minutes of the last MPC meeting are released on Friday. Three of the six members of the rate panel were appointed this month and many economists consider them more moderate than previous members.
“The current growth-inflation assessment seems to suggest that the MPC would like to stay on a long hiatus,” wrote Citi’s Chakraborty. “Slow growth momentum would force the MPC to keep rates low, while fear of inflation may not allow it to cut further.”
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