RBI's rejection of demand for cut in interest rates hits market sentiments
Declining prices of vegetables and other food items pulled down inflation, measured by Wholesale Price Index (WPI), to five-year low of 3.74 per cent in August. India Inc, accordingly, immediately asked the Reserve Bank of India (RBI) to cut interest rates and lower the cost of capital in its upcoming monetary policy review, but the central bank insisted that “there is no point in cutting interest rates” to see prices go up again.
RBI’s insistence on not cutting interest rates, following the Friday’s data that showed India’s Industrial Production (IIP) growth slowing to four-month low in July, had a negative impact on market with Sensex falling 244.48 points to end at 26,816.56, while Nifty slid 63.50 points to 8,042. Even rupee depreciated against the US dollar to 61.05, further dampening market sentiments.
The August inflation, measured by WPI, declined from 5.19 per cent in July, while the same was 6.99 per cent in the same month last year. The August WPI inflation is the lowest since October, 2009 when it stood at 1.8 per cent. According to the official data released on Monday, inflation in the food segment saw a significant decline to 5.15 per cent in August from 8.43 per cent in July.
Vegetable prices contracted 4.88 per cent in August, registering the third continuous month of decline. Onion prices were down by 44.7 per cent. Potato prices, however, were on the rise as inflation in the kitchen essential jumped to 61.61 per cent in August from 46.41 per cent in July.
With WPI inflation coming down to five-year low level, India Inc has raised the pitch for lowering of the interest rate to boost industrial output that slipped to four month low of 0.5 per cent in July. Speaking at a function in Mumbai, Reserve Bank Governor Raghuram Rajan, however, said prices across the board have to come down to enable the central bank to cut key rates.
"There is no point in cutting interest rates to see inflation picking up again," he said, adding that right now he thinks the RBI is continuing the way it proposed recently.
The RBI is targeting a retail inflation of 8 per cent by January next year and six per cent by January, 2016.
The retail inflation, measured on Consumer Price Index (CPI), too eased to 7.8 per cent in August compared to 7.96 per cent in July. Taking a dig at the industry for its persistent demand for a cut in lending rates even when there is a price increase, Rajan asked them to bring down prices instead.
"When you do that then we will do that, we have no problem. Clearly, you will have no consensus on this," he said. Reacting to the latest inflation data, India Inc asked the Reserve Bank of India (RBI) to cut interest rates and lower the cost of capital in its upcoming monetary policy review.
"With strong actions coming in from the Government, we are hopeful of a sustained moderation in inflation. Coming shortly before the Monetary Policy, this should also provide the necessary manoeuvring space to the RBI," said CII Director General Chandrajit Banerjee.
According to the data, inflation in the fruits eased to 20.31 per cent.
While prices of protein rich items like egg, meat, and fish contracted during the month, inflation in milk and pulses inched up to 12.18 per cent and 7.81 per cent, respectively, as compared to July.
Ficci president Sidharth Birla opined that it was imperative to continue working on the structural bottlenecks. "Some announcements have already been made by the Government on this front and we hope that the implementation part will get greater traction now," he said.
The price rise in manufactured goods, like sugar and edible oils, too eased to 3.45 per cent in August, while it was 3.67 per cent in July. Inflation in the fuel and power segments, which include lPG, petrol and diesel, declined to 4.54 per cent as compared to price rise of 7.40 per cent seen in July.
Meanwhile, wholesale inflation based on final index for June has been revised upwards to 5.66 per cent from the provisional estimate of 5.43 per cent. The August WPI data is also provisional, the Government said.