Industry sees room for rates cut on easing of inflation

Cooling of food, fuel prices around the world

R Chandrasekaran

CHENNAI: The wholesale price index (WPI) eased further in April thus providing the industry with ammunition to seek further cut in interest rates. What is important is that the WPI came in within the Reserve Bank of India’s comfort zone.

The WPI advanced 4.89 percent in April compared to 5.96 percent rise in March. April’s WPI growth is the lowest after November 2009 and came in below analysts’ expectations of 5.5 percent. Inflation has been one of the big headaches for reducing interest rates.

On May 3, the RBI has reduced interest rates by 25 basis points and indicated that slashing interest rates alone will not stimulate growth. The central bank Governor Dr.D. Subbarao also indicated the deteriorating current account deficit as a biggest threat to the economy.

Inflation eased primarily because of the cooling of fuel and food prices helped by weaker commodities prices around the world. Only yesterday, the government data indicated a fall in food prices to 10.61 percent in April from 12.42 percent in March.

While inflation data may support the call for trimming of interest rates, the widening of trade deficit, current account deficit and fiscal deficit will continue to bother the RBI before taking a decision on further easing of monetary policy.

However, Federation of Indian Chambers of Commerce and Industry (FICCI) president Naina Lal Kidwai sees that softening inflation should offer more space to the Central Bank for considering further cuts. This is especially necessary as lending rates have not really come down in spite of a 1.25 percentage points cut in repo rate between April 2012 and May 2013.

Meanwhile, Barclays Capital Regional Economist in Singapore Rahul Bajoria has told Reuters that inflation will continue to be in the downtrend in the next six months since food prices are likely to remain stable and the manufacturing prices will be weak hurt by slower growth and stable commodity prices. He believes that this should allow the central bank to think of reducing more cuts in interest rates. He sees a possibility of 75 basis points rate cuts during the next two quarters.

Similarly, JPMorgan India also expects further easing of monetary policy with 25 basis points predicted in June meeting. There more analysts and economists expecting a rate cut in the next meeting. The government also favors slashing of interest rates. However, the RBI has been putting the onus on the government to announce more measures, especially in the infrastructure sector, for growth as interest rates reduction alone will not stimulate growth. Therefore, there will be tremendous pressure on the central bank during their next meeting for rate cuts.

To contact the author, e-mail: rchandrasekaran@americanbazaaronline.com

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