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Inflation Near Zero, May Help Ease Rates

17 April, 2009

India’s annual inflation rate headed towards zero in early April, which could give the Reserve Bank of India (RBI) room to cut interest rates when it reviews policy next week.

Although there were upward price pressures in some items such as food, manufactured products and fuel, analysts said they expected the inflation rate would soon turn negative due to the high prices last year.

The wholesale price index, India’s most widely watched inflation measure, rose 0.18 percent in the 12 months to April 4, below the previous week’s rise of 0.26 percent and above a forecast for a fall of 0.18 percent in a Reuters poll.

“Although higher price pressure from primary articles and fuel price indices have kept inflation in the positive terrain, I think it is only a matter of time for inflation to dip to negative,” said Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai.

“We still expect rate cuts from the Reserve Bank of India by June 2009, and repo rate could go down to 4 percent while the reverse repo rate may be at 3 percent.”

The central bank has cut its main short-term lending rate by 400 basis points in five moves since October, and the central bank has called on banks to pass the lower rates on to customers.

A Reuters poll showed analysts are almost evenly split over whether the central bank would cut its key lending rates at its review on Tuesday.

The wholesale price based-inflation rate has fallen sharply since peaking at just under 13 percent in August, but annual consumer price inflation in February was 9.63 percent, as prices of food products remain firm.

Financial markets largely remained cool to the data with the benchmark 10-year bond yield briefly rising half a basis point to 6.53 percent, while the partially convertible rupee was unchanged at 49.5050/51 per dollar.

Some analysts said the annual inflation rate masked a strong trend in price pressures over the past few weeks.

“The index has increased significantly on a week-on-week basis, which means the pressure emanating from primary articles prices, especially vegetables, fruit, edible oil, are exerting significant upward pressure on the wholesale price index,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.

“Though on a year-on-year basis because of the high statistical base we are seeing a continuous drop in inflation, the spike in prices week-on-week is pretty high.”

 


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Inflation Near Zero, May Help Ease Rates

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