India sails alone in an "island of inflation worries"

In March, the WPI (whole sale price) based inflation hit negative rate (for the fourth month in a row) and exports fell 21% yoy (the worst fall in the last six years). For the whole of FY2015, exports were down by 1.23% yoy – the third annual contraction in India's exports in the last 6 years.

Banking credit growth too slowed to around 12% in FY2015 which is at an 18 year low! The Index of Industrial Production grew at meager 1.1% in FY2013 and contracted at 0.1% in FY2014. After almost stagnating for two consecutive financial years, it has limped back at 2.8% for the cumulative period April-February 2015! Still the policy decision makers in India are keeping the benchmark interest rate (Repo rate) at a very high level of 7.5%!

On global front, the food crop prices have hit 6 year low. While the crude oil prices are down 45% from last year peak, steel prices are down 26% in the last 6 months and iron ore prices are down 60% yoy. Baltic freight index – an indicator of shipping rate which partly reflects the momentum in global trades - has come down from 11,793 in 2008 to around 600 now – a fall of 95%!

Over 20 countries slipped into "low-inflation" at the end of 2014 with inflation rate ranging from 0% to 1.5%. The inflation rate fell 0.1% in the euro zone. While UK inflation hit zero, in France, Euro zone's second biggest economy, the inflation rate turned negative in March at -0.10%. Japan's economy, the third largest in the world, came out of recession in the fourth quarter of 2014, but its core consumer inflation stopped rising for the first time in nearly 2 years. In January-March 2015 quarter China's GDP grew at its slowest pace since 2009.

In India, during the last 8 years, the Repo rate hovered around 7.5% when the CPI-based inflation were in the range of 6.72% to as high as 11.44%. Now the CPI-based inflation has fallen to 5.17% as against the average rate of 8.69% during the period 2012-2015, the central bank is still reluctant to cut down the benchmark rate from 7.5%.

The number of countries, which have stepped up their monetary easing measures this year, has gone up to 24. It is very difficult to comprehend how maintaining the high level of interest rates could bring down the price levels of necessities, which dominate the CPI basket. "Sailing alone in an island of inflation worries" is unlikely to continue further - the time is ripe for the industrial economy and the equity markets to anticipate aggressive rate cuts unless the monsoon fails miserably.