Consumer inflation eases; rate cut expectations rise

Consumer inflation eased to 5.17 per cent in March compared to 5.37 per cent in the previous month despite higher fuel prices and unseasonal rains jacking up the price of fruits and vegetables, as per the latest official statistics.

Price of consumer products and services, as captured by consumer price index (CPI), had been slowly creeping up for the previous three months even though it remained well within the comfort zone of the central bank.

The inflation rate which dipped last in November to 4.38 per cent, eased this month despite threat to food prices from heavy rains at the start of March which destroyed a chunk of rabi crops across the country. RBI governor in the monetary policy review last week stated that initial estimates indicate that as much as 17 per cent of the sown area under the rabi crop may have been affected.

According to the official data, consumer food price index eased to 6.14 per cent in March, down from 6.88 per cent in February. Price rise of vegetables and fruits slowed to 11.26 percent (13.01 per cent in February) and 7.41 percent (8.93 per cent in February) respectively.

Moreover, a marginal rebound in global crude prices contributed to a higher rate of fuel inflation which rose to 5.07 per cent in March higher than 4.72 per cent in February. Oil price which fell almost two thirds from a high of $115 per barrel last year to $46 a barrel in January has risen again in March.

Although inflation eased last month, it is expected to increase in the coming months. RBI's survey of inflation expectations released last week showed that those expecting general prices to rise by ‘more than current rate’ during the next three months as well as the next one year have marginally increased.

RBI projections of inflation released in the monetary policy report indicate that after reaching 4 per cent by the mid of this year inflation would rise up to 5.8 per cent by the end of this financial year. The bank indicated that there are upside risks to this from possible intensification of el nio conditions leading to a below normal monsoon; large deviations in vegetable and fruit prices from their regular seasonal patterns, given unseasonal rains; larger than anticipated administered price revisions; faster closing of the output gap; geo-political developments leading to hardening of global commodity prices; and spillover from external developments through exchange rate and asset price channels.

The central bank has set a target of 6 per cent level by January 2016 and is targeting a flexible inflation rate of 2-6 per cent now.

Rate cut expectations on the rise

Easing inflation leaves room for at least one more rate cut for the central bank. The RBI is expected to cut rates further by 25 bps by June said a survey conducted by VCCircle a fortnight ago.

RBI in its first monetary policy review last week held rates at 7.50 per cent indicating that while the bank still holds an accommodative stance it shall look for further data from inflation.

The central bank expressed concerns over the transmission of rates to consumers by banks. While RBI has delivered two rate cuts for the quarter the banks have been reluctant in passing off the benefits. Since then the commercial banks have come out and cut lending rates. Many banks including the country's leading lenders SBI, ICICI, HDFC and Axis have cut rates by up to 25 bps point since the RBI meeting.

The figures for industrial output released last week also make a stronger case for a rate cut as the IIP figures touched a nine month high rising 5 per cent in February.

Also while the global commodity prices have seen a rebound, the oil prices are still far away from a rally indicating that RBI would still have some wiggle room for rate cuts.

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