Pressure on current account deficit to ease.
Here is a raft of good news. For one, India’s wholesale price inflation (WPI) fell more than the expected to a 40-month low of 5.96% in March as industrial demand slipped along with prices of food items.
Secondly, Brent crude oil prices plunged below $100 levels after a long while. And, there’s more. Prices of gold are on a tailspin.
Both these items — crude oil and gold imports — have caused the biggest strain on India’s finances, widening the current account deficit to a massive 6.7%, and constraining the Reserve Bank of India (RBI) from cutting rates.
RBI governor D Subbarao will review interest rates on May 3.
What should egg him on is that industrial growth continues to decline as vouchered by the fall in core (manufacturing )inflation, which fell to 3.5% from 3.8%.
The RBI has to completely change its focus from fighting inflation to growth if it has to generate jobs and income for people, say economists. This will need going for bigger policy rate cuts.
“The RBI will cut repo rate by 25bps (basis points). That’s for sure, considering that growth has slowed down sharply. Inflation is largely in line with expectations. But forward guidance will stay cautious,” says Gaurav Kapur, senior economist, RBS.
The repo rate, or the rate at which the central bank lends to banks, stands at 7.50%.
“A sharp decline in headline inflation, in general, and core inflation, in particular, along with slowing economy, fiscal consolidation efforts by the government and reform process since mid-September 2012 augurs well for cautious monetary easing,” says Devendra Kumar Pant, chief economist, India Ratings & Research, a unit of Fitch Ratings.
But Sonal Varma and Aman Mohunta, economists with Nomura Securities, caution that they do not see this downtrend in WPI as sustainable due to the likely release of suppressed inflation from coal and electricity price hikes, a rise in food prices and their view of depreciation in rupee in the second half of 2013.
The RBI started cutting policy rates in January after a pause of nine months. It cut 25bps from the repo rate cut in January-end and by another 25 in March, marking a clear shift from inflation control to slowing growth.
A slowing economy has weakened the purchasing power in urban and rural areas alike.
While gross domestic product growth has fallen to 4.5%, WPI has been on a downtrend for the last six months.
@MeghaMandavia
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