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| Inflation at 2-yr low fuels rate-cut hopes |
| BS Reporter / New Delhi Feb 15, 2012, 00:36 IST |
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 Inflation dropped sharply after having remained above nine per cent for a year till November. It fell to a more than two-year low of 6.55 per cent in January, raising hopes the Reserve Bank would go for a rate cut in its March review. In December, inflation had fallen to 7.47 per cent from 9.46 per cent in the previous month.
Encouraging inflation data and rate-cut expectations boosted market sentiment. While the BSE benchmark index, Sensex, closed higher by 75.73 points to settle at a six-month high of 17,848.57 points, government bond yields eased. Yields on the 10-year benchmark government bond fell two basis points to close at 8.18 per cent. In fact, inflation fell much faster than expected by the central bank, which had projected it to come down to seven per cent by March 2012.
Finance Minister Pranab Mukherjee has now exuded confidence that inflation will be closer to six per cent by March.
In January, the inflation fall could be credited to deflation in food articles and a moderation in the rate of price rise in manufactured products to 6.49 per cent from the usual seven-eight per cent for a long time. Core inflation (manufactured items minus processed food products) declined to a one-year low of 6.68 per cent in January from 7.72 per cent in the previous month. “We expect a 50-basis point cut in the repo rate in the mid-quarter review in March,” YES Bank chief economist Shubhada Rao said.
Moody’s Analytics senior economist Glenn Levine said it was only a matter of time before the RBI lowered rates. “We expect a March rate cut, with a couple more cuts through the year, depending on what inflation does in the coming months.”
However, there are some contrarian views on the RBI’s expected moves and also caution on inflation, particularly the rate of price rise in food items.
“Though inflation has fallen, it is not too significant for the RBI to start cutting rates, as the risk of inflation flaring up remains,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
The RBI will watch three more sets of crucial data before it comes out with the monetary policy — the GDP numbers for the third quarter of the financial year, industrial growth numbers for January and inflation figures for February.
Mukherjee has termed the rate of price rise in protein-based items a reason to worry. “International commodity prices have fallen and the fall in inflation in food and primary articles is reflected in manufactured products as well,” said the Prime Minister’s Economic Advisory Council chairman, C Rangarajan.
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