September inflation seen at 6-month high on GST, public sector pay rise

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India’s retail inflation edged up in September, driven by higher salaries of government employees as well as the impact of the Goods and Services Tax (GST), a Reuters poll found, a development that would make further monetary policy easing unlikely.

Consumer inflation is forecast to have risen to 3.60 per cent in September from a year ago, above August’s 3.36 per cent, the poll of 36 economists showed.

The data is due to be released on October 12 at 1200 GMT. If the September number matches the poll consensus, inflation would be the highest in six months – yet still below the Reserve Bank of India’s mid-term target of 4 per cent.

A recent hike in house rent allowances for government employees, coupled with staggered price hikes by firms adjusting to the new national tax, contributed to price rises, said Sonal Varma, Chief India Economist at Nomura.

The new tax, introduced July 1, caused disruptions to business activity in the manufacturing and services sectors that were still recovering from the government’s move late last year to scrap high-value banknotes.

Annual economic growth dropped to a three-year low of 5.7 per cent in the April-June quarter, raising calls for further monetary policy easing by the central bank.

However in a recent interview, RBI Governor Urjit Patel said although economic growth was a constant consideration for the central bank, it would not take precedence over its inflation target.

While leaving interest rates on hold at its October rate-setting meeting – the first after a cut in August – the central bank cut growth estimates and raised inflation projections for this fiscal year.

Wholesale prices are forecast to have risen 3.41 per cent in September from a year ago versus 3.24 per cent in August, the latest poll found.

It also predicted industrial production rose 2.4 per cent in August, up from July’s 1.2 per cent growth.

“These could be taken as early signs that the industrial sector is gradually coming out of the disruptive impact of demonetisation and (the) GST,” wrote Rupa Rege Nitsure at L&T Financial Services in a note to clients.

“Going ahead, industrial production growth prints may not sustain at the same level.”