Case builds for Reserve Bank of India (RBI) rate cuts

For the Reserve Bank of India (RBI), the conspicuous facet of Thursday’s inflation data was in the core.

At 3.8%, core inflation was the lowest in 35 months and tells the tale of a worrying drop in manufacturing demand, which, in turn, underscores a flailing economy.

To Siddhartha Sanyal and Rahul Bajoria, economists at Barclays, the case for an easing by the RBI has clearly strengthened.

“Growth momentum is clearly weak … It is important to note that government spending growth slowed to around 3% in September-January, versus around 20%  in April-September. Fiscal austerity has had a considerable impact on household purchasing power in recent months leading to the dent in growth,” they said.

The Wholesale Price Index (WPI)-based inflation rose to 6.84% in February from 6.62% in the previous month on account of adjustment in the prices of LPG and diesel. Fuel inflation rose to 10.47% from 7.06% in January.

“If the increase in LPG and diesel were not implemented, WPI inflation for February would have been close to 6.3%, underpinning the downward trajectory that started in October 2012,” Sanyal and Bajoria wrote in a note.

Leif Eskesen, economist for India and Asean at HSBC, said that both wholesale and consumer inflation are likely to ease gradually in future.

“The RBI is likely to deliver another 25 bps rate cut next week on the back of decline in core inflation and the government’s fiscal consolidation efforts,” he said.

The Barclays economists said while current account deficit will likely remain elevated in the near term, the unfolding growth-inflation dynamics should clearly remain the focus for the RBI’s upcoming rate decision.

Those signals, the Street believes, are good enough for the RBI to move aggressively on rate cuts.

The RBI had cut repo rate and cash reserve ratio by 25 bps in January in response to downward inflation trajectory.

However, high retail inflation that is running in double digits and wider current account deficit were seen as biggest risks to the policy actions going forward.

@thtTallgirl