The steep fall in crude oil prices and commodity prices will keep inflation down, helping the Reserve Bank of India to ease rates, according to economists.
Devendra Pant, economist with India Ratings, said the global crude oil prices have declined sharply in 2014. "Price of Indian crude basket declined 50.7% between April 1, 2014 and January 5, 2015. In absence of muted revenue growth, sharp decline in crude prices has given significant relief to the government, that is finding it hard to keep fiscal deficit in check. The benefit to fiscal deficit is from two counts firstly, decline in oil subsidy bill and secondly, increased excise on petrol and diesel."
The consumer price inflation (CPI) fell to 4.4% in November 2014 from 8.6% in April 2014.
The key issue before the central bank is sustainability of low retail inflation, both in short and medium terms. The current reading on retail inflation is not only below the January 2015 target of 8% but also lower than the January 2016 target of 6%.
The favourable base effect would begin to wane from December 2014, and this could push inflation up from the current levels. Also, the full outcome of this year's deficient monsoon has yet not percolated into the economy, and some price pressure on cereals, oil seeds and pulses in the near term due to estimated shortfall of kharif crop cannot be ruled out. But economists believe that inflation to remain soft in the near term due to the sharp fall in global commodity prices including crude and supply of winter vegetables. Therefore, a rate cut in February 2015 looks like a possibility provided the inflation data does not surprise on the upside."
D K Joshi, chief economist, Crisil, however, said the rating agency expects rates to ease only by April. He told dna, "We believe that the RBI would wait till April to be certain about the trajectory of inflation as they are expecting."
Indranil Sen Gupta of Bank of America-Merrill Lynch said in a report, "We continue to expect the RBI governor Raghuram Rajan to cut rates by 25 basis points on February 3. The December policy was dovish in line with our expectation that the RBI will find the balance of risks to its January 2016."
There should be greater comfort that "imported" inflation is abating as the US Fed rate hike expectations keep global commodity prices in check.
"Forex reserves, not rates, are key to stability of Indian rupee in our view, with governor Rajan recouping forex reserves. Experience suggests that high import cover – rather than high rates – hold the key to Indian rupee stability," the BofA-ML report said.
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