Rate cut hope brightened as inflation eased to a three year low of 5.96 per cent in March. This is the lowest level of Wholesale Price Index (WPI) inflation since December 2009 when it was 4.95 per cent.
India Ratings said the cooling off in both core and general inflation readings, coupled with fiscal consolidation and reform measures undertaken by Government, will help RBI Governor Duvvuri Subbarao go for a “cautious monetary easing”.
Citing the downward trend, Crisil said the average headline inflation for FY14 will go down to 6.3 per cent from the 7.3 per cent in FY13.“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 per cent 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.
Foreign brokerage Credit Suisse said there is 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, which is due to be released later this week.
Credit Suisse pointed that RBI’s preferred measure of core WPI inflation is also down to 3.5 per cent, the seventh consecutive drop and the lowest since February 2010.
Data released on Monday said softening vegetable prices help pull down inflation to 5.96 per cent in March rom 6.84 per cent in the previous month.
However, Sonal Verma of Japanese financial firm Nomura sounded cautious, saying the downward trend is 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 second half of the year.
“Besides weak demand, the bulk of moderation in core WPI inflation is due to lower commodity prices,” she said.
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 (-)0.95 per cent in March, from 12.11 per cent in the previous month.
Commenting on the inflation numbers, Planning Commission Deputy Chairman Montek Singh Ahluwalia said inflationary pressure is coming down gradually.
“Inflation behaviour is consistent with what Government has been saying that it is slowly coming under control,” he said.
“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 RBI to reduce both the repo rate and CRR by 0.25 per cent,” 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 has raised expectations of rate cut by RBI to boost growth. RBI will announce its annual policy on May 3.