Pressure is coming down gradually, says Montek Singh Ahluwalia

Softening vegetable prices pulled down inflation to over three-year low of 5.96 per cent in March, raising hopes of a rate cut next month by the Reserve Bank of India to boost economic growth.

This is the lowest level of Wholesale Price Index (WPI)-based inflation since December 2009 when it was 4.95 per cent.

Inflation based on the WPI stood at 6.84 per cent in February. In March 2012, it was 7.69 per cent.

Food inflation, which has 14.34 per cent share in the WPI basket, declined to 8.73 per cent in March from 11.38 per cent in February.

Easing of food inflation was on account of a sharp drop in prices of vegetables. Inflation in vegetables stood at (-) 0.95 per cent in March, against 12.11 per cent in the previous month.

Commenting on the inflation numbers, Planning Commission Deputy Chairman Montek Singh Ahluwalia said inflationary pressure was coming down gradually.

“Inflation behaviour is consistent with what government has been saying that it is slowly coming under control,” he said.

Experts said WPI had come down mainly on easing of fruits and vegetable prices, but retail inflation continued to be in double digit as food inflation remained structurally high.

Deflationary trends

“The easing has happened on account of a significant decline in global commodity prices in March and growing deflationary trends in manufacturing sector. I expect the RBI to reduce both the repo rate and CRR by 0.25 percentage points,” Bank of Baroda Chief Economist Rupa Rege Nitsure said.

Inflation for January, however, was revised upwards to 7.31 per cent, from 6.62 per cent provisionally.

The decline in March inflation and a slowdown in industrial output growth to 0.6 per cent in February have raised expectations of rate cut by the RBI to boost growth. The RBI will announce its annual policy on May 3.

The 5.96 per cent March-end inflation is much lower than the Reserve Bank’s projection of 6.8 per cent.

“Near one percentage point drop in the inflation has come as a big relief to the industry and as a pointer to the RBI to reverse its hawkish policies and cut the interest rates rather aggressively,” said Rajkumar Dhoot, President of Associated Chambers of Commerce and Industry of India (Assocham).

Inflation in the manufactured items category witnessed a marginal decline at 4.07 per cent in March. It was 4.51 per cent in February.

The rate of price rise of onions was 94.85 per cent, as against 154.33 per cent.

Inflation in rice prices eased to 17.90 per cent from 18.84 per cent.

To spur rate cuts, say analysts

The drop in headline inflation to a 40-month low of 5.96 per cent for March has increased the possibility of a rate cut by the RBI , analysts and rating agencies said on Monday.

India Ratings said the cooling off in core and general inflation readings, coupled with fiscal consolidation and reform measures undertaken by the government, would help RBI Governor D. Subbarao go in for a “cautious monetary easing”.

Interestingly, in the last policy review in March, when it had cut the repo rate by 0.25 percentage points to 7.5 per cent, the apex bank had virtually ruled out a rate cut in the near future, saying it had a limited room because of the high current account deficit.

Citing the downward trend, Crisil said the average headline inflation for 2013-14 will go down to 6.3 per cent from 7.3 per cent in 2012-13.

“The probability of inflation surprising on the downside is high,” the rating agency said.

“We expect the central bank to cut the repo rate by clips of 0.25 percentage points in the next two policy meetings in May and June. We think RBI will support an easing monetary policy bias in the next few months,” Deutsche Bank said.

‘Green signal’

Foreign brokerage Credit Suisse said there was a “green signal” for a rate cut in the May monetary policy announcement and also discounted the only inhibiting factor of trade data for March, due to be released later this week.

Credit Suisse pointed out that the RBI’s preferred measure of core WPI inflation was also down to 3.5 per cent, the seventh consecutive drop and the lowest since February 2010.

However, Sonal Verma of Japanese financial firm Nomura sounded cautious, saying the downward trend was not sustainable due to the likely release of suppressed inflation on coal and electricity price hikes, a rise in food prices and an expected depreciation in the rupee in the second half of the year.

“Besides weak demand, the bulk of moderation in core WPI inflation is due to lower commodity prices,” she said.