DNA Money Edit: RBI, it’s time to slash interest rate

The persistent drop in retail inflation in December has opened a window of hope for an imminent cut in interest rates. As retail inflation slowed to an 18-month-low of 2.19% in December, riding lower food prices, down from 2.33% a month ago, it provides a great opportunity for the Reserve Bank of India (RBI) to prop up economic growth by slashing the rate.

What is interesting is that the wholesale price inflation has also decelerated to an eight-month low of 3.8% in December from 4.64% a month ago on the back of softening inflation for fuel as well as manufactured items. The consumer price index (CPI)-based inflation is likely to remain much below RBI’s comfort zone of 4%, with 2% +ve or -ve, for some time until the food inflation paces up.

The industrial production growth unexpectedly plummeted to a 17-month low in November at 0.5% from a year ago, much lower than the expected 3.6%. Analysts are saying that the central bank may need to cut its growth projection for the year ending March closer to 7% from 7.4% to reflect the likely case of below 7% expansion in the second half. Slower growth in gross domestic product and the possibility of inflation undershooting the 2% lower boundary of the RBI’s target range should force the central bank to cut the rate quickly.