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LATEST NEWS UPDATES | Interest rates may fall as inflation slows to 3-year low

Interest rates may fall as inflation slows to 3-year low

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published Published on Apr 16, 2013   modified Modified on Apr 16, 2013
-The Times of India


The inflation rate slowed to a more than three-year low of 5.96% in March on the back of softening vegetable, fruits and milk prices, brightening the prospect of an interest rate cut by RBI while bringing relief for the politically beleaguered government.

Lower interest rates would provide relief to thousands of borrowers reeling under the burden of high equated monthly installments ( EMIs) on their home loans.

Data released by the commerce ministry on Monday showed the widely watched wholesale price index (WPI) rose 5.96%, slower than the previous month's 6.84% and in line with the central bank's expectations. A fresh inflation level, a forty month-low, instantly triggered celebrations in the government, among industry as well as on the bourses.

Stubborn inflation has been a policy headache for nearly three years and this is the first time in 40 months that inflation has dropped below the 6%-mark. Politically, the deceleration in price rise augurs well for a government as it deals with popular sullenness over inflation, corruption and the perception of inaction.

The sense of relief in government was evident from Planning Commission deputy chairman Montek Singh Ahluwalia's reaction to the data. "Inflation behaviour is consistent with what government has been saying that it is slowly coming under control," Ahluwalia said.

A clamour was already building up for a reduction in rates, with India Inc calling for aggressive cuts against the backdrop of easing price pressures saying that it was crucial for the revival of economic growth expected to slow to a decade's low of 5% in the just-ended financial year.

The BSE Sensex, which remained choppy in the face of some disappointing company earnings and sluggish economic data last week, joined in the celebrations. The bellwether index bounced back 115 points to close at 18,357.80 points on hopes of an interest rate cut when the RBI meets to review policy on May 3.

But the data showed that pressure points still existed in some segments such as cereals and pulses while food inflation still remains in double digits at the retail level. The government also revised upwards the January number to 7.31% from the previously reported 6.62% largely due to the impact of the diesel price increase.

Slowing global crude and gold prices have also brought some relief for the government battling a widening current account deficit and fiscal deficit. While the softening in inflation provides some leeway for the central bank to ease rates to boost growth, it would be guided by the high current account and fiscal deficit.

The moderation in inflationary pressures was led by vegetables which declined an annual 0.95% in March. Prices of fruit, milk, eggs, meat and fish also softened.

"Given elevated levels of CPI (10.4%) and the CAD, we are maintaining our view of a 25 basis points cut in the RBI's May 3 policy, followed by a long pause," said Rohini Malkani, Citigroup India economist in a note.

"What could change this is lower commodity prices - both oil and gold which will not only have a positive impact on inflation but also on the fisc and current account," Malkani said.

Growth is estimated to have slowed to a decade's low of 5% in the 2012-13 fiscal year and both the RBI and the government have taken steps to revive sentiment and boost growth. The RBI has cut interest rates twice this year but has moved cautiously against the backdrop of stubborn inflation. It will review monetary policy on May 3 and economists expect it to ease rates by about 25 basis points.

Ratings agency Crisil said core or non-food manufacturing inflation continued its downward momentum and fell to 3.5% in March, reflecting reduced pricing power of firms due to slowing demand in the economy. Weakening rural demand in 2012-13 has also reduced protein-food (milk, egg, fish & meat) inflation, which had risen significantly over the last few years driven by high growth in rural incomes. Average protein-food inflation declined to 10.4% in 2012-13 from 11.3% in 2011-12 and 23.2% in 2010-11, the agency said.

India Ratings & Research chief economist Devendra Kumar Pant said the sharp decline in headline inflation in general and core inflation in particular along with slowing economy, fiscal consolidation efforts by the government and reform process since mid-September 2012 augured well for cautious monetary easing.

He said he expected a 50 basis points-75 basis points calibrated monetary policy easing in FY14.


The Times of India, 16 April, 2013, http://timesofindia.indiatimes.com/business/india-business/Interest-rates-may-fall-as-inflation-slows-to-3-year-low/articleshow/19568859.cms


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