Mumbai/New Delhi: Indians have started paying more for items ranging from movie tickets to cholesterol tests, thanks to GST, and that raises the prospect the central bank will grow more cautious about cutting interest rates deeply.
Increases in charges for services, if sustained, threaten to push up core inflation, which excludes food and energy prices. Nomura estimates the annual core rate could rise as much as 60 basis points.
Although headline inflation slumped to 2.18 per cent in May, its lowest since a new series was adopted five years ago, core inflation has stubbornly stayed above 4 per cent for years.
Statements from the RBI’s monetary policy committee have cited core inflation as a key reason for keeping rates on hold at 6.25 per cent since October, given concerns it will spill over into broader prices and threaten the RBI’s target of 4 per cent headline inflation.
An acceleration could make the central bank extra-cautious in reducing rates at a time many analysts believe the economy, weakened by over-leveraged banks and tiny private investment, could handle cuts of up to 50 bps instead of the single 25 bps trim expected at the next review in August.
“Given that the long-term target is to have inflation at 4 per cent on a durable basis, the central bank is bound to exercise some caution while assessing core inflation,” said A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai. “Therefore we can expect just one more rate cut.”
India will post June inflation data on Wednesday, with the headline rate expected to ease below 2 per cent, though the core one is likely to stay around 4 per cent. Under GST, rates for services have been raised.
