K.R. Srivats

New Delhi, Sept. 5 A Government battling inflation will go in for “further substantial” tightening of monetary policy over the next six months, Barclays Capital has predicted in a research report on the Indian economy.

“We expect the RBI to continue to withdraw liquidity and keep liquidity conditions tight over the next three to six months. In the next few weeks (and before the October 24 credit policy review meeting), we believe RBI will hike the cash reserve ratio by 25 basis points and repo rate by 25 basis points, putting both at 9.25 per cent versus the current 9 per cent. By end-2008, we expect the repo rate to be 10.5-11 per cent and CRR to be 10-10.5 per cent,” says the report.

Barclays Capital believes that the political dynamics in India is likely to ensure that macro policy-making, over the next few months, remains sound via tight monetary and neutral fiscal policy.

It is of the view that private sector industrial users of diesel could be asked to pay more than the subsidised price commencing this month. This could add 50 basis points to the headline inflation .

“We continue to believe demand side pressures on inflation will persist for the next one or two quarters. Without a fuel price hike in September, Wholesale price index (WPI) inflation could accelerate to 13-15 per cent year-on-year in September from an average of 13 per cent in August. With a September fuel price adjustment for bulk users of diesel, WPI inflation could exceed 15 per cent during that month. Our average WPI forecast for 2008-09 is 14 per cent versus 4.7 per cent in 2007-08.”

These moves on diesel prices would be due to the possibility of the local currency sovereign rating outlook being downgraded to Negative from Stable, Barclays Capital report said.

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