SBI expects inflation to be lower than RBI’s target

Mumbai/Washington: India’s biggest lender, State Bank of India (SBI), sees inflation below the Reserve Bank of India’s (RBI) target at year’s end, giving governor Raghuram Rajan room to reduce borrowing costs.

Rajan is expected to lower the benchmark repurchase rate for the fourth time this year to 7% in a policy review on Tuesday. Thirty seven of 45 economists in a Bloomberg survey predict a quarter-point cut, with seven forecasting no change and one anticipating a 50 basis-point reduction.

SBI expects consumer-price inflation at 5% by December, chairwoman Arundhati Bhattacharya said in an interview with Bloomberg TV in New York. That’s “really undershooting” the central bank’s 6% target, she said.

“Inflation is on its way down,” Bhattacharya said. “Therefore there is definitely a reason to look at lowering of rates.”

Rajan last month resisted pressure from the government to ease borrowing costs to ensure his inflation target isn’t at risk from surging food prices, a poor monsoon and a possible increase in US interest rates. Those concerns have eased, with the Federal Reserve keeping rates near zero and a resurgence of rain limiting food-price gains.

Consumer price inflation, the monetary authority’s benchmark, eased to 3.66% in August from a revised 3.69%—below target for a 12th straight month. WHOLESALEprices declined 4.95% in August from a year earlier after falling 4.05% in July. Interest rate swaps signal a cut in the benchmark rate to 7% by the end of 2015.

“There has been a massive demand destruction as a result of which we have seen inflation coming down a lot,” Bhattacharya said. Weak commodity prices have also helped India, she said.

“Having started out as an inflation warrior, I think governor Rajan would really like to ensure that inflation is put down once and for all,” she said. Even so, she added, economic growth is also necessary to ease supply constraints that currently contribute to inflation.

“We have to understand that it’s not only a demand push that is causing this problem but also a supply constraint,” she said.

Rajan’s fight against rising prices has done little to lower household inflation expectations, which the central bank flagged as a crucial part of bringing inflation to its medium-term target of around 4%.

Household expectations of where inflation will be in a year hit more than 10% in June from as low as 8.9% in December, according to a central bank survey published on 4 August.

“Probably that could be one of the reasons why he has maintained more of a hawkish stance,” Bhattacharya said.