Inflation at 8.98% raises chances of RBI rate cut

Inflation at 8.98% raises chances of RBI rate cut
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First Published: Fri, Nov 14 2008. 12 57 AM IST

Updated: Sat, Nov 15 2008. 02 09 PM IST
New Delhi: The country’s inflation rate eased to 8.98% in the week ended 1 November, the first time the closely watched Wholesale Price Index (WPI) is down to single digits in 21 weeks after hitting 12.91% in August, fuelling hopes that the Reserve Bank of India (RBI) might further cut its policy rates to support growth.
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The 1.74 percentage point drop in the inflation index was the largest since 1990, according to data available on Bloomberg.
Data released by the department of industrial policy and promotion (DIPP) in the ministry of commerce and industry showed that the WPI inflation rate rose 8.98% for the week ended 1 November, compared with 10.72% in the previous week. However, the inflation rate was much lower at 3.4% during the year-ago week.
India’s inflation rate crossed the double-digit mark in the first week of June this year after the government increased administered retail fuel prices of petrol and diesel on account of rising crude oil prices and mounting under-recoveries by domestic oil marketing companies. After peaking in August, it has followed a downward path with softening global fuel and commodity prices.
The sharp decline in the inflation rate is due to cheaper fuel items such as naphtha, aviation turbine fuel (ATF), furnace oil and light diesel oil as a result of falling global crude prices, which are trading at 20-month lows at $56.16 (Rs2,741) from $145 a barrel in July. Earlier, the government had withdrawn the 5% basic customs duty on ATF on 31 October.
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Manufactured products index, which accounts for aro-und 64% of WPI, also softened to 8.06% compared with 9.09% a week ago, due to lower prices of iron and steel products.
“There is a sharper correction in inflation than expected. This is clearly a good news. This gives clearly strong cues for the RBI to effect further rate cuts to support economic growth. All lead indicators suggest growth is not going to be stronger and is decelerating faster than anticipated. The only thing holding back further rate cuts was the high level of inflation,” said Shubhada Rao, chief economist with Yes Bank LtdRao expects RBI to cut its repurchase rate, or the so-called repo rate, by 50 basis points (bps) and the reverse repo by 25-50 bps along with other liquidity-injecting measures.
The repo rate is the rate at which RBI injects money into the financial system or lends money to banks.
The central bank has already taken a slew of measures in recent weeks, including cutting the repo rate by 150 bps to 7.5% and lowering banks’ reserve requirements to improve liquidity and boost economic growth.
Data released by the Central Statistical Organisation on Wednesday showed that during the first half of the current fiscal year, industrial output grew 4.9% compared with 9.5% during the same period a year ago. Initial data released by various agencies showed sales of automobiles declined 14.4% in October, while merchandise exports shrank 15% during the same month. Data released by the department of revenue on Tuesday also showed that growth in customs and excise collections have entered the negative zone during October.
“This (sharp decline in inflation rate) is partly because of deceleration in the economy. There is also a drop in demand for non-food items. On the food prices front, though there is no decline in demand, de-stocking is happening due to better agricultural production,” said Siddhartha Roy, chief economist at Tata group.
Kotak Mahindra Bank Ltd’s chief economist Indranil Pan said: “We expect inflation rate to come down to below 5% by March-end, which will be an extremely comfortable situation for the central Bank.” Rao expects the inflation rate to come down to 4.5-5% by end-March.
RBI, in its half-yearly monetary policy review in October, had projected the inflation rate to moderate to 7% by end-March and said that it would endeavour to bring down inflation to a tolerable level of below 5% at the earliest, “while aiming for convergence with the global average inflation of around 3% over the medium-term”.
India’s financial markets were closed on Thursday.
Kartik Goyal of Bloomberg contributed to this story.
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First Published: Fri, Nov 14 2008. 12 57 AM IST