New Delhi: The annual rate of inflation based on the monthly provisional Wholesale Price Index (WPI) rose to 7.55% in May from 7.23% in April. WPI inflation was 9.56% in May last year, figures released by the ministry of commerce and industry showed.
A Reuters poll had predicted May WPI inflation at 7.6%, while a CNBC-TV18 poll estimated it at 7.4%.
The numbers will ease pressure on the Reserve Bank of India to cut interest rates in the mid-term policy review on 18 June. A basis point is one hundredth of a percentage point.
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Expert views
• A. Prasanna, ICICI Securities Primary Dealership, Mumbai
“Since core inflation is still below 5%, I would expect RBI to cut rates by 25 basis points as that is the key number. There are cost pressures on inflation from rupee depreciation, excise duty increases, but I don’t think that will spill over to the demand side because the demand side pressure are quite weak evident from the manufacturing inflation.”
• Rajeev Malik, economist, CLSA, Singapore
“The most important negative is the massive revision to the March number, which means the May headline inflation may be revised upwards. Even if the magnitude of revision is not as high as the March number, the May number may still be closer to 8%.
“I don’t think this data, especially the revision, gives much of breathing space to the Reserve Bank of India to cut the repo rate, maybe the cash reserve ratio (by 25-50 basis points) but bear in mind that the RBI has indicated it is comfortable with liquidity.”
• Rahul Bajoria, regional economist, Barclays, Singapore
“While the May number was in line with expectation, the scariest thing in today’s data is the March revision. However, that is driven mostly by food prices as the core inflation for March has been revised just to 5% from 4.7%.
“So the trend is that we are moving down on core inflation and it does open up room for the RBI to do more given that this print will incorporate most part of the currency’s weakness.
“Going ahead we expect seasonality factors, lower crude oil precise will keep headline number close to 7.5% and core inflation around 4.5-5%.”
• Anubhuti Sahay, economist, Standard Chartered Bank, Mumbai
“It is true that the headline inflation though in line with our expectation is still elevated and the upward revision to the March print is massive. But we believe that with core inflation below 5% (4.85% in our view) and a dramatic deterioration in growth outlook since the last policy, RBI is likely to reduce repo rate by 25 bps to 7.75% when it meets on 18 June.”
• Abheek Barua, chief economist, HDFC Bank, New Delhi
“I don’t think the revision as such is a huge worry. I think the RBI will use the latest number, both headline and core in the course of action on Monday. I think that this course of action would have been influenced by growth and industrial production.
“The core number is a little below 5%, which the RBI has been highlighting, and that should give a comfort the central bank needs to go ahead with some monetary easing. The principal motivation would come from growth, and this core inflation number should not hinder that. Our calculation shows core inflation at 4.96%.
“I think there is a clear need to infuse liquidity in the system. I think RBI would continue with open market and secondary market operations, and would wait until the July policy to cut the CRR. But, I think there is some probability of a 25 basis points cut in repo rate being supplemented by a 25 basis points cut in the CRR on Monday. Our base case, however, is of only a 25 basis points cut in the repo rate.”
• Philip Wyatt, economist, UBS, Hong Kong
“I think rupee depreciation, high headline inflation number and upward revision in previous month inflation numbers may delay a repo rate cut but I think RBI will start with quantitative easing by cutting the CRR (cash reserve ratio) by 50 basis points at its June policy review.
“However, with core inflation coming below 5% for the last three months and down from its November peak of 7.9%, I think there is scope for RBI to cut rates later in the year if the headline inflation number comes down and trade balance narrows.”
• Shubhada Rao, chief economist, Yes Bank, Mumbai
“Inflation pressures are alive and kicking. The pressure now is clearly from food. If food inflation persists for a long time, it may translate into broad-based generalised price pressure.
“We are expecting a 25 basis points rate cut on 18 June. We don’t expect a cut in the cash reserve ratio as of now, because liquidity deficit being Rs70,000 crore to Rs80,000 crore.
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Background
• Standard & Poor’s this week said that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
• The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75% on 18 June when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.
• Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates, a deputy governor said last week.
• Industrial output rose just 0.1% in April, lower than expectations in a Reuters poll for a 1.7% increase. Output fell in March from a year earlier by 3.5%.
• The economy expanded 5.3% in the March quarter, its slowest pace in nine years, on a combination of mounting global uncertainties, muddled policies, high inflation and steep interest rates at home.
• Manufacturing sector kept up its steady expansion in May, driven by rising output, a business survey showed.
• Car sales rose just 2.8% in May from a year earlier as a hike in excise duty on the vehicles hit demand.
Reuters also contributed to this story
