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RBI seen softening stand on policy rate as inflation cools

January 16, 2014 10:16 IST


Photographs: Danish Siddiqui/Reuters BS Reporter in New Delhi

The wholesale inflation rate declined to a five-month low of 6.16 per cent in December, mainly on account of a moderation in food price increase, data showed on Wednesday.

This, coupled with favourable numbers for retail inflation, industrial production and manufacturing, fuelled hopes the Reserve Bank of India might maintain the status quo on the policy rate in its monetary policy review later this month.

In its first month-on-month decline since May 2013, the Wholesale Price Index-based inflation in December came down from a 14-month high of 7.52 per cent the previous month.

It had stood at 7.31 per cent in December 2012.

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RBI seen softening stand on policy rate as inflation cools


Photographs: Reuters

Inflation in onions, the main driver of a surge in vegetable prices, nosedived to 39.56 per cent in December, from 190.34 per cent the previous month.

On a year-on-year basis, the vegetable prices rose 57.33 per cent in December.

But this rate of rise was much lower than 95.25 per cent the previous month.

As a result, food inflation, which has a little over 14 per cent weight in WPI, fell to 13.68 per cent from 19.93 per cent in November.

According to analysts, the cooling of inflation will give some comfort to RBI, which may consider holding the repo rate in its coming monetary policy review on January 28.

“Going by the fresh set of data -- Index of Industrial Production, Services Purchasing Managers’ Index, retail inflation and wholesale inflation, RBI would likely maintain the status quo,” said Bank of Baroda Chief Economist Rupa Rege-Nitsure.

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RBI seen softening stand on policy rate as inflation cools


Holding the interest rate in the mid-quarter monetary policy review in December, RBI Governor Raghuram Rajan had said the central bank needed to be cautious on rate hikes as growth remained weak.

He had also said he expected vegetable prices to start declining soon.

Earlier, RBI had hiked interest rates twice this financial year -- in September and October -- by 25 bps each.

“If the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, RBI will act,” Rajan had said.

Economists said inflation had now fallen more than expectations.

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RBI seen softening stand on policy rate as inflation cools


Photographs: Reuters

“We had pegged it at 6.4 per cent. . . It has come further down, thanks to an easing of inflation in vegetables,” said India Ratings Chief Economist Devendra Pant.

Core inflation (that in manufactured products, excluding food items), considered a key determinant for RBI’s monetary stance, rose in December, albeit marginally.

It rose to 2.75 per cent from 2.63 per cent the previous month but managed to stay at a sub-three-per-cent level.

The rate of core CPI inflation was higher -- at 8.05 per cent.

It was 7.97 per cent the previous month.

“A weakness in consumer demand and a relative exchange-rate stability suggest that core inflation is unlikely to accelerate sharply,” said Icra Senior Economist Aditi Nayar.

Some analysts saw the core inflation numbers limiting possibilities on the policy rate front for RBI.

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RBI seen softening stand on policy rate as inflation cools


Photographs: Reuters

“We believe the decline in headline price pressures is significant enough, both at the wholesale and retail levels, but the core inflation hasn’t declined.

So, based on the exact guidance, RBI should hike the repo rate in the coming policy review -- the absence of softening in exclusion-based metric acting as a trigger,” said ICICI Securities PD Chief Economist A Prasanna.

But there are others who were earlier expecting the central bank to raise the policy rate but now feel there could be the status quo.

“We expected another round of repo rate hike. But a sharp drop in primary inflation and an encouraging fall in core inflation, along with a persistent weakness in economic growth will prompt RBI to hold the rate for the remaining part of this financial year,” said YES Bank Chief Economist Shubhada Rao.

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RBI seen softening stand on policy rate as inflation cools

Image: An employee poses with the bundles of Indian rupee notes inside a bank in Agartala.
Photographs: Jayanta Dey/Reuters

At a time policymakers are looking for green shoots of recovery, growth has consistently disappointed.

The economy grew 4.6 per cent in the first half of the current financial year, against 5.3 per cent in the corresponding period last year.

Also, industrial production contracted in the first two months of the second half of this financial year.

According to the widely-tracked HSBC PMI, services, too, refused to look up in the first three months of the second half, while exports, which had in October seen a double-digit growth rate for a fourth straight month, grew at single-digit rates in both November and December.

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Tags: HSBC PMI , RBI

RBI seen softening stand on policy rate as inflation cools


Photographs: Reuters

After the country’s economy grew at a decade low of five per cent in 2012-13, Prime Minister Manmohan Singh had pegged the economic growth rate for this financial year to be at the same level.

In its outlook on the Indian economy released on Tuesday, India Ratings had further scaled growth projection further down to 4.9 per cent.

Given all that, will RBI hold the rate at the current level or even look at lowering it? Experts said though inflation had come down, it was still not low enough to give RBI the comfort to slash the policy rate.

“Inflation is easing but it is still above the central bank’s comfort zone. . .RBI will go for a rate cut only when there are clear signs of easing; that is unlikely in the near future,” Rege-Nitsure added.

Meanwhile, the government on Wednesday revised its provisional inflation reading for October from seven per cent to 7.24 per cent.

Source: source