May inflation hits 7.55,puts RBIs rate action in doubt

March data revised up to 7.69; Sensex sheds 203 points; Rupee dips by 12 paise

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Hopes of a major interest rate cut by the Reserve Bank of India were dashed on Thursday with the headline inflation,based on the annual wholesale price index WPI,surging to 7.55 per cent in May.

The numbers brought the bellwether Sensex at the BSE down 203 points a 1.2 per cent dip over its close on Wednesday with the rupee too dipping by 12 paise to end at 55.8 against the US dollar. The inflation numbers are the last set of data points that RBI has got to mull over before it announces its revision of the credit policy on Monday. A cut in rates is being anticipated by large segments of industry as the only way to revive investment climate in the economy,as the government is unable to make any significant move to change tax policies. But a higher inflation will make RBI wary of lowering rates too much,as it could rebuild pressure on prices.

Markets had buoyed this week on the hope of a substantial rate cut as the fourth quarter GDP data of 5.3 per cent 2011-12,followed by the IIP data for April 2012 at 0.1 per cent had seemed to confirm that the economy needed a big push to revive from its current slump. The latest trade data for May also shows the same trend with exports contracting by 4.16 per cent as demand from euro zone remained muted. More worryingly imports into India too has slumped by 7.36 per cent conforming a slowdown in manufacturing. Commenting on the inflation numbers Indranil Pan,chief economist at Kotak Mahindra Bank said We believe it would be prudent for the RBI to sit on the sidelines at the moment and pass the ball into the governments court to act on reviving investor demand and thus stabilising growth.

Thursdays numbers however showed that core inflation,a measure of inflation net of seasonal items like food,has moved below 5 per cent to 4.8 per cent which definitely indicates a slowdown in industrial production. But despite the softening of the core inflation the markets now expect the RBI to take a tempered view of the needs of the economy.

Sonal Varma,analyst,at Nomura said Our view is that the RBI will support growth by cutting the repo rate by 25 bps on June and by a total of 50 bps in 2012,but with no cut likely in the cash reserve ratio. Cash reserve ratio describes the percentage of bank deposits that RBI compulsorily impounds as a means to leverage growth of credit.

Rating agency Moodys described Indias present situation as one of stagflation stagnant growth with raised inflation. Its conclusion in a report put out on Thursday was the RBI could cut rates without putting too much upward pressure on inflation as growth has slumped. The surge in the May estimate has kept inflation levels near its highest level this year March data was revised up to a 2012 high of 7.69 per cent. The rise in the wholesale price index from the 7.23 per cent year on year rise in April,came as both food and fuel prices soared. Headline inflation stood at 9.56 per cent a year ago in May 2011.

Without mentioning rates,finance minister Pranab Mukherjee told reporters,I am confident that inflation would range 6.5 to 7.5 per cent throughout the year. I hope if monsoon is quite good,then it would be possible that this type of pressures on prices would be sorted out. He acknowledged that government needs to address supply side constraints and invest in warehousing and cold storage facilities.

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Cant control inflation without sacrificing growth: Subbarao
Hyderabad: Amid widespread demands of a rate cut by RBI in its monetary policy review next week,Governor D Subbarao on Thursday said inflation cannot be controlled without sacrificing some growth. You cannot control inflation without sacrificing some growth, he told reporters here after a meeting of FSDC sub committee.

PTI