Inflation edges up, rate cuts still expected

Inflation edges up, rate cuts still expected
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First Published: Thu, Jan 29 2009. 01 58 PM IST
Updated: Thu, Jan 29 2009. 01 58 PM IST
New Delhi: Indian inflation edged up for a second week in mid-January due to lingering effects of a strike by truck drivers, but analysts said the broader trend was down and they still expect the Reserve Bank of India (RBI) to cut interest rates.
Wednesday’s cut in state-set fuel prices of up to 11% was expected to see inflation fall further, with the minister of state for finance saying on Thursday it would chop about 1 percentage point off the annual rate over the next two weeks.
The wholesale price index, the most widely watched inflation measure, rose 5.64% in the 12 months to 17 January, data showed on Thursday, slightly higher than the previous week’s 5.60% and above a forecast of 5.41% in a Reuters poll.
The data came two days after the central bank held interest rates steady at a policy review where it cut its growth forecast and said inflation would decline to below 3% by end of the fiscal year in March.
“Inflationary pressures are diminishing and we expect the RBI to cut both the repo and reverse repo rates by 50 basis points before March 2009,” said Sonal Varma, economist at Nomura Research.
Markets showed little reaction to the data. The 10-year bond yield rose briefly to 6.12% from 6.10% earlier and the partially convertible rupee unchanged around 48.90 per dollar.
“Higher inflation this week is mainly due to the lagging effect of the truckers’ strike and it should cool down again in coming weeks,” said DK Joshi, principal economist at CRISIL.
Millions of truck drivers held an eight-day strike earlier this month which pushed up prices of commodities and disrupted supplies of industrial goods.
“The trend for inflation continues to be decisively downwards and the effect of the fuel price cut should be seen in the next 2-3 weeks,” Joshi said.
Rate Cuts Loom
The central bank’s main lending rate, the repo, has been cut by 350 basis points since October to 5.5% and the reverse repo, the rate at which the bank absorbs funds from the market, has been cut by 200 basis points since December to 4%.
With growth tipped to slow to a six-year low of 7% or less in 2008-09 from rates of 9% or higher in each of the last three fiscal years, analysts expect more rate cuts from the central bank to boost demand and shore up activity.
A Reuters poll conducted after the central bank’s policy review on Tuesday found nine out of 12 analysts expect a 50 basis points cut in its main lending rate and borrowing rates in the next three months.
On Wednesday, the International Monetary Fund revised down growth projections for India, Asia’s third-biggest economy, to 5.1% in calendar 2009 from 6.3%.
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First Published: Thu, Jan 29 2009. 01 58 PM IST
More Topics: Inflation | WPI | GDP | Rate cuts | Commodities |