Inflation may drop below 2% by March: Experts

Inflation might dip below the 2 per cent level by the end of the current fiscal due to slackening demand and sharp decline in commodity and manufactured goods prices, say economists.

“I expect Inflation to drop sharply to below 2 per cent by March due to the sharp decline in manufactured goods prices and commodity prices,” HDFC Bank Chief Economist Abheek Barua said.

The inflation dropped significantly for the sixth consecutive week to 6.84 per cent for the week ended December 6, the lowest in nine months, after rising close to 13 per cent in the month of August.

Barua expects it to further decline to 6.48 per cent for the week ended December 13 and sees more rate cuts by the RBI before its January policy. “I expect a 100 basis point cut in the repo and reverse repo rates,” he added. Axis Bank economist Saugata Bhattacharya also believe that due to the falling demand, except that of primary articles, inflation might drop to 2 per cent by the end of fiscal year 2008-09.

Echoing a similar view, Crisil Principal Economist D K Joshi said, “By March, I expect the rate of inflation may come down to 2-3 per cent due to the slackening demand and the base effect.”

He added that the sharp decline of commodity prices is leading to the fall of manufactured good prices.

In addition to the fall in commodity prices, the decision of the government to reduce prices of petrol and diesel by Rs 5 per litre and Rs 2 per litre, respectively, and the December 7 stimulus package, that envisages 4 per cent cut in excise duty, will have a cascading effect on prices in the coming months.

Crisil’s economist Joshi said the central bank can take more monetary easing measures in the coming days and slash interest rates further.

The RBI has taken a host of measures releasing as much as Rs 3,00,000 crore to fuel growth and with the inflation coming down further, it might take more steps to boost industrial output.

Indicating that the RBI could take more steps to ease liquidity and trigger further softening of interest rates, the Mid-Year Review of the economy tabled by the government in Parliament recently said “there is considerable scope for monetary policy easing over the next six to 12 months”.

Chief Economic Advisor Arvind Virmani also said the inflation is under control and will come to an acceptable level of 5 per cent by the end of the fiscal.

Prime Minister’s Economic Advisory Council Chairman Suresh D Tendulkar expects inflation between 4 and 5 per cent by March and sees 100 basis points cut in short-term lending (repo) and short-term borrowing rates by the RBI.

“Inflation has started declining. I see it (inflation) between 4 and 5 per cent by March, may be even before that...It is desirable to cut repo, reverse repo by 100 basis points,” he said.

On December 17, however, the RBI said India’s inflation “continues to be above the acceptable level” and the global financial crisis has become more ‘widespread’ in the domestic economy despite global markets showing signs of recovery.

High inflation and moderation in the economic growth has made the monetary policy management more difficult for the policy makers, the RBI said.