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Inflation Up But Scope For Rate Cuts Remain

21 May, 2009

Indian inflation edged up in early May on higher food and metal prices, but analysts said it could turn negative in June and give more freedom to the central bank to cut rates for stimulating a slowing economy.

The widely-watched wholesale price index rose 0.61 percent in the 12 months to May 9, matching analysts’ expectation and higher than 0.48 percent of the previous week.

The data comes after the ruling coalition won a second five-year term in general election. Prime Minister-elect Manmohan Singh is set to be sworn in on Friday, and the new government is expected to announce a budget by the end of June.

Jyotinder Kaur, an economist with HDFC Bank, said a rise in food items was the prime reason for inflation picking up but it was still expected to dip below zero, she said.

“It is going to be negative possibly by the end of May or the first week of June,” said.

A survey of professional forecasters by the central bank found wholesale price inflation may decline 1.4 percent in the June quarter, as the statistical effect of an acceleration of prices last year works into the data.

The Reserve Bank of India (RBI) has also said a brief decline in wholesale price index does not mean Asia’s third-largest economy would slip into deflation. It forecast inflation at around 4 percent by end of March 2010.

“The near-normal monsoon forecasts… may lead to a decent harvest, and thus may ease inflationary pressures in primary food articles segment, going forward,” said Yashika Singh, Mumbai-based head of economic analysis at Dun & Bradstreet India.

With benign inflation, analysts said monetary policy would continue to focus on boosting economic growth that is estimated to slow to a seven-year low of 6 percent in 2009/10 fiscal year, from less than 7 percent of last year.

The central bank has cut its lending rate by 425 basis points since October, while the government slashed duties and increased public spending to stimulate the economy hit harder-than-expected by the global slump and falling domestic demand.

Analysts said there was little fiscal space for higher spending in the wake of an already-bloated government borrowing plan. Instead, further monetary easing was likely.

“I think, the interest rate could come down by another 50 to 75 basis points by March end,” said D.K. Joshi, principal economist of rating agency CRISIL.

“The RBI may cut the lending rate by 25 basis points in each of its policy reviews,” he said, referring to the central bank’s quarterly meetings coming up in July, October and January.

Bond yields and the rupee did not react to the data. The benchmark stock index was choppy as investors took profits for a second day, after it soared 17.5 percent in two days on hopes a new government will push reforms such asset sales and boost foreign investment.


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Inflation Up But Scope For Rate Cuts Remain

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