BW Communities

Inflation Up, So's Demand For Rate Cut

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Inflation accelerated in May, adding to an avalanche of harsh data for the beleaguered leaders and making it harder for the RBI to revitalise the flagging economy with a widely expected RBI interest rate cut next week. The 7.55 per cent rise in the wholesale price index (WPI) over a year earlier came as both food and fuel price pressures intensified. The outcome matched expectations in a Reuters poll, but an upward revision to the March number to a 2012 high of 7.69 percent raised worries of greater pressure to come. "The most important negative is the massive revision to the March number, which means the May headline inflation may be revised upwards" said Rajeev Malik, an economist with Singapore-based brokerage CLSA. "I don't think this data, especially the revision, gives much breathing space to the Reserve Bank of India." Most analysts expect the Reserve Bank of India to cut its repo rate to 7.75 per cent from 8 per cent when it meets on Monday, following a 50 basis point cut in April. A slump in economic growth in the first quarter to a nine year low of 5.3 percent will trump immediate concerns about inflation, they said. A drop in core inflation, which excludes food and fuel, eases concerns about cutting rates, they said. The RBI might also cut required levels of bank reserves as well. "Growth is in stagnation, especially manufacturing. The loss of momentum is very, very perceptible," said Shubhada Rao, chief economist at Yes Bank in Mumbai. But a 3 basis-point rise in the benchmark 10-year bond yield to 8.32 percent signalled some expectations that more aggressive policy easing was unlikely. The one-year OIS rate rose 4 basis points to 7.53 per cent. Bank shares pulled back from an earlier rally to push down Sensex 0.9 percent. India's inflation is higher than major industrialised economies and its peers in the so-called BRIC grouping, which includes Brazil, Russia, and China. It is one reason Prime Minister Manmohan Singh has balked at cutting diesel subsidies blamed for the government's wide fiscal deficit. New Delhi is under increasing pressure to reform after the January-March slide in growth. Finance Minister Pranab Mukherjee said he was "confident" headline inflation would remain between 6.5-7.5 percent throughout the fiscal year 2012/13, possibly suggesting he is comfortable with that range. India cautiously raised petrol prices last month but has not tackled more politically sensitive and subsidised fuels, such as diesel. Speaking on the sidelines of an OPEC meeting in Vienna, India's oil minister blamed high global oil prices for weak growth in India, which is a net importer of crude. Adding to India's economic gloom, provisional trade data on Thursday showed exports slumped more than 4 percent in May from a year earlier, the second fall in three months. The trade deficit widened to $16.3 billion. "We are passing through difficult times," senior trade ministry official Anup Pujari told reporters. The founder of one of India's leading IT firms this week berated the government as "without a leader," Standard & Poor's warned the country could be downgraded to junk status because of political inaction, and data on Tuesday showed India's industrial output growth flatlined in April. Eased Concerns The WPI showed inflation quickened from 7.23 per cent in April, keeping it near the highest levels this year. Core inflation dropped to 4.85 per cent, down by about a percentage point from February. Economists calculate core inflation from the data. "Since core inflation is still below 5 percent, I would expect RBI to cut rates by 25 basis points as that is the key number," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai. India's repo rate of 8.00 percent is the highest central bank policy rate among major economies in Asia. One reason behind the slowdown in India's economy was a series of 13 rate rises between March 2010 and October 2011 to quell inflation, which nevertheless remains relatively high. Supply bottlenecks that stoke price pressures remain largely unattended by the government. A fall in the Indian rupee by 13 percent against the U.S. dollar since early February has raised import price pressures. The economic slowdown has been deepened by the euro zone debt crisis, a policy logjam in New Delhi and its preoccupation with selecting a president from the political ranks next month for the mostly-ceremonial role. Capital inflows have slowed and the current account and fiscal deficits widened, raising fears in some quarters that India could face a repeat of a 1991 balance of payments crisis. This week's industrial output data suggested little pick up in activity from the first quarter, triggering fresh calls for the government to restart an economic liberalisation programme stalled since 2004. US companies have grown increasingly concerned, "fearing that the investment environment has deteriorated," White House international affairs adviser Michael Froman said on Tuesday, a day before high-level talks aimed at cementing US-India ties. "There is no room left for any fiscal stimulus, so to trigger growth, the RBI has to lower policy rates," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai. (Reuters)