Tue, Apr 17, 2012 - Page 10 News List

India’s headline inflation slows down

UNKNOWN KNOWNS:India’s dependence on imported crude means it is vulnerable to oil market fluctuations and a rising fuel subsidy continues to hobble its finances

Reuters, NEW DELHI

India’s headline inflation eased marginally last month helped by a softening in the price of manufactured goods, reinforcing expectations that the Reserve Bank of India (RBI) would cut interest rate for the first time in three years today to revive economic growth.

The wholesale price index (WPI), India’s main inflation indicator, rose an annual 6.89 percent last month, higher than 6.70 percent rise estimated by analysts. Wholesale prices rose 6.95 percent in February.

The annual reading for January was revised up to 6.89 percent from 6.55 percent, the government said in a release yesterday.

The central bank’s nearly two-year long battle against high inflation, coupled with a political logjam in New Delhi and an uncertain global economy, has slowed down India’s economic growth. That growth probably faltered to a three-year low of 6.9 percent in the fiscal year that ended on March 31.

“For the RBI what should -really matter is the manufacturing number as policy rates act on the demand side, so we think the RBI will cut rates,” said A. Prasanna, an economist at ICICI Securities Primary Dealership.

The bank is widely expected to cut its main lending rate — the repo rate — by 25 basis points to 8.25 percent when it reviews policy today.

It has already lowered the banks’ cash reserve ratio, the amount banks must maintain with the central bank in cash, by 125 -basis points in two moves since late January to 4.75 percent, making more money available for lending.

Manufacturing goods inflation — a barometer for demand-driven price pressures — dropped to 4.87 percent from 5.75 percent in February.

Financial markets, which are betting on a rate cut today, shrugged off the data.

However, a spike in food prices and suppressed fuel inflation are likely to temper the quantum of rate cuts for the year. Food prices rose 9.94 percent year-on-year last month compared with a 6.07 percent rise the previous month, while fuel inflation eased to 10.41 percent from 12.83 percent in February.

“In the coming months, primary and fuel inflation will continue to inch higher, because of seasonality and in fuel because of incomplete adjustment in prices,” YES Bank chief economist Shubhada Rao said

Domestic political compulsions have helped keep fuel inflation largely steady. Global oil prices have been on the boil on rising geo-political tensions despite the prospect of cooling demand in a slowing global economy.

India’s heavy dependence on imported crude makes it vulnerable to the vagaries of the oil market. Even as a soaring fuel subsidy bill bleeds its finances, political compulsions have prevented the government from raising pump prices.

New Delhi risks a further erosion of fiscal credibility if it continues to delay a decision on raising fuel prices, but any increase in prices could accelerate inflation, which in turn could have a bearing on the central bank’s monetary policy.

“We remain slightly hesitant of calling for aggressive rate movements by the RBI and the incremental pace of change will depend on the inflationary dynamics,” said Indranil Pan, chief economist at Kotak Mahindra Bank, who expects a 25 basis points rate cut on today.

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