Giving some respite to common man, inflation eased to three-and-a-half year low of 4.7 per cent in May. The development has provided some scope for the Reserve Bank to cut interest rates in its policy review on Monday so as to spur growth.
Falling for the fourth straight month, inflation reached the lowest level since November 2009 when it was 4.50 per cent. Inflation based on the Wholesale Price Index (WPI) stood at 4.89 per cent in April. In May 2012, it was 7.55 per cent.
Inflation in food articles category, which has 14.34 per cent share in the WPI basket, however, rose to 8.25 per cent in May. It was at 6.08 per cent in April. Manufacturing inflation declined to 3.11 per cent in May from 3.41 per cent in April. Commenting on inflation figures, Planning Commission Deputy Chairman Montek Singh Ahluwalia said it indicates a distinct downturn on inflation which is welcome.
“They (RBI) should certainly consider it because it is very clear that the underline inflationary pressure is softening,” he added. Industry chamber Ficci demanded that RBI should consider a rate cut and persuade banks to pass on rate cut benefits to borrowers. “With the downward trend in the prices holding on, RBI can consider a cut in the policy rate in the forthcoming monetary policy review,” it said.
Commenting on inflation numbers, Finance Ministry officials said they want lower interest rates and monetary policy transmission. Analysts, however, were of the view that it may be difficult for the Reserve Bank to cut rates in view of the sharp decline in the value of the rupee against the US dollar. Inflation for March, meanwhile, has been revised downward to 5.65 per cent from 5.96 per cent as per provisional estimates, as per the official data release today.
Inflation in non-food articles category, which include fibre, oil seeds and minerals, saw a sharp decline in the rate of price rise to 4.88 per cent, from 7.59 per cent in April ICRA Senior Economist Aditi Nayar said: “With mounting concerns related to the size and financing of the current account deficit in April-June quarter we expect the RBI to desist from monetary easing in the upcoming policy review, in spite of the persistent weakness in industrial growth.”
The industrial output grew at a meagre 2.3 per cent in April. While the Reserve Bank has lowered interest rates by 1.30 per cent since January 2012, the banks have cut lending rates by only 0.30 per cent.
“If rupee stabilises, growth concern could come to force again and the RBI may cut policy rates by about 0.50-0.75 per cent during the full fiscal,” HDFC Bank Economist Jyotinder Kaur said. As per the WPI data, rise in food inflation was on account of increase in prices of onions, vegetables, cereals and protein- based items. Inflation in vegetables was 4.85 per cent in May, against (-)9.05 per cent in the previous month.
The rate of price rise in onion was high at 97.40 per cent for the month, as against inflation rate of 91.69 per cent in April.For the fuel and power category, it was lower at 7.32 per cent in May as compared to 8.84 per cent in April, 2013. Data released earlier this week showed retail inflation falling to a 15-month low of 9.31 per cent in May.
‘RBI may cut policy rates by 0.25%’
The Reserve Bank of India is likely to cut policy rates by 0.25 per cent and keep the cash reserve ratio unchanged at its policy review next week, on the back of slower-than-expected growth and more encouraging inflation readings, says a report by HSBC.
“From the RBI’s perspective, the slower-than-expected growth and recently more encouraging inflation readings should pave the way for another 25 bps rate cut on June 17, but we do not expect a cut in the CRR with the liquidity deficit (as on June 12) hovering near the RBI’s comfort level,” HSBC said in a research note.
The foreign brokerage firm further said, “We will, nevertheless, not preclude the possibility that the recent weakness in the INR could keep the RBI on hold in June.”