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Inflation eases marginally, all eyes on RBI now

Inflation eases marginally, all eyes on RBI now

New Delhi: Sending confusing signals ahead of a mid-quarter monetary policy review by the central bank, India’s provisional headline inflation rate slowed to a year’s low in November while the final inflation rate for September touched double digits for the first time since July 2010.

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Headline inflation gained at an annual 9.11% in November, slowing marginally from 9.73% a month ago, provisional data released by the industry department on Wednesday showed.

The latest figures may complicate matters for the Reserve Bank of India (RBI), which was expected to shift its bias towards growth from inflation in its Friday policy review as the pace of economic growth eased.

Factory output contracted 5.1% in October, indicating the economy is slowing at a faster pace than was expected. This prompted finance minister Pranab Mukherjee to indicate there may be a shift in focus from fighting inflation to promoting growth.

“Our own fight against inflation has also taken a toll on investments by our corporations," Mukherjee said on Wednesday. “We must turn our attention now to reviving growth as quickly as possible."

Capital goods activity, which indicate investment demand in the economy, shrank 25.5% in October, data released on Monday showed.

“I am expecting that the present downturn will be temporary and our economy will soon revert back to high-growth trajectory," Mukherjee said at the Delhi Economic Conclave organized by the finance ministry and the National Institute of Public Finance and Policy.

Kaushik Basu, chief economic adviser to the finance ministry, said he expected food inflation to slow to less than 3% within a month.

Food inflation stood at 6.6% for the week ended 26 November.

“We must not overreact to the negative IIP (Index of Industrial Production) figure. However, it will be a grave mistake to put the blame for everything on international situation," Basu said at the conclave. “Growth needs to (be) our focus now."

C. Rangarajan, chairman of the Prime Minister’s economic advisory council, when asked about Mukherjee’s comment on shifting the focus to growth, said though growth is important, the monetary authority has a responsibility to tame the inflation rate.

“Even according to the latest numbers, it is still above 9%. Therefore, the concern regarding inflation cannot be taken away from the monetary authority," he said.

State Bank of India chairman Pratip Chaudhuri concurred with him. “Central banks all over the world are not responsible for growth, but they are surely responsbile for controlling inflation," he said.

In October, core inflation, calculated by taking out the food portion from inflation in manufactured items, rose to its highest since March at 8%, from 7.6% in the previous month. “This could possibly be attributed to the currency weakness offsetting the decline in commodity prices," Citi India said in a report released on Wednesday.

The rupee has been falling steadily and ended Wednesday at a new low of 53.72 a dollar.

Rajeev Malik, senior economist, CLSA, Singapore, wrote in a note that lower food inflation has more than offset the impact of higher core inflation in November.

However, economists expect the high level of inflation last year, or the base effect, will bring down the inflation rate in the coming months.

Citi India expects WPI (Wholesale Price Index, or headline inflation) to trend lower in the coming quarter and end the fiscal at less than 7%.

Citi India also expects RBI will begin easing policy rates in the April-June quarter of 2012-13. “We believe that the poor macro data as reflected in sub-7% GDP (gross domestic product) growth, contraction in IIP, slowing Purchasing Managers’ Index and weak sectoral trends coupled with signs of abating inflationary pressures deserves some monetary stimulus. We place the odds at 30% for advancement of the easing cycle," it said.

Remya Nair contributed to this story.

Also Read |Headline inflation falls; risks remain

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