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Economy Apr 15, 2013

Inflation undershoots expectations, bets rise for another rate cut

By Sourav Majumdar

Finally, the mandarins at North Block as well as those in the Reserve Bank of India (RBI) may have some reason to afford a smile on the inflation front. At 5.96 percent for March 2013, the latest inflation print is the lowest recorded since November 2009.

Coming after a series of depressing developments on the economic front - led by a decline in auto sales and the poor performances on the core sector, electricity and cement), the latest inflation figure is bound to give a fillip to those segments clamoring for another rate cut when the RBI meets on 3 May to decide its monetary policy stance.

The inflation figure comes close on the heels of a 0.6 percent growth figure for the Index of Industrial Production (IIP) for February 2013, which came through in positive territory mainly on the back of a sharp turnaround in the capital goods sector and the continued growth in consumer non-durables.

Reuters


While the weakness in IIP, credit growth and in the latest PMI print point to the continuing need for monetary easing, the current account deficit (CAD) continues to be a serious cause for concern. Reuters

While analysts had already forecast a further monetary easing based on the sluggish IIP figure - the figure would have slipped to a negative without the strong showing in capital goods - the lower than estimated inflation figure adds muscle to the demand for another round of monetary easing by the central bank.

Pointing to the weak IIP and the easing of the consumer price index (CPI) to 10.4 percent in March from the previous month's 10.9 percent, broking firm Motilal Oswal, for instance, sees a 25 bps rate cut in May saying that this is because of the growth-inflation mix favoring such a move at this point. This would be in conformity with RBI's stance of a calibrated easing of rates, the broking firm says.

Shubhada Rao, chief economist at the private sector YES Bank, also sees a 25 bps rate cut next month, and another 25 bps during the rest of calendar year 2013. "The combination of lower commodity prices and dilution of pricing power caused by the negative output gap is likely to keep a check on price pressures in the economy. This offers a window to the Reserve Bank of India to ease monetary policy," says Rao, reacting to the March WPI figure.

CAD concerns

While the weakness in IIP, credit growth and in the latest PMI print point to the continuing need for monetary easing, the current account deficit (CAD) continues to be a serious cause for concern, and something which is bound to weigh on RBI's mind when deciding on its monetary policy stance. Rao, for instance, says the extent of monetary easing could be limited by the elevated level of CAD, the political compulsions of an election year and the fact that CPI still remains in double digits.

But given the fact that WPI has undershot expectations for five out of the last six months, there is a good possibility of RBI getting a window this time to provide a further push to the sputtering growth engine by way of a rate cut. If it does so, it will be its third consecutive cut, having lowered repo by 25 bps the past two times. Bankers also continue to expect further easing of liquidity by way of cash reserve ratio (CRR) cuts and open market operations (OMOs) over the next few months.

But for now, the growth-inflation balance seems to be tilting in favor of growth as far as monetary easing is concerned. That should be good news for India Inc.

by Sourav Majumdar

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