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Dip in core inflation for 4th month may embolden RBI

A gradual but steady softening in the non-food manufactured inflation or core inflation coupled with muted industrial output may force the Reserve Bank of India to loosen its grip on the tight monetary stance

Written by ENS Economic Bureau | New Delhi | Published: April 17, 2012 1:05:43 am

A gradual but steady softening in the non-food manufactured inflation or core inflation coupled with muted industrial output may force the Reserve Bank of India (RBI) to loosen its grip on the tight monetary stance on Tuesday.

Data released on Monday revealed that non-food manufactured inflation declined for the fourth straight month to 4.87 per cent in March this year,as against 5.7 per cent in February. Economists said the high cost of capital not only lowered the appetite for consumer goods such as cars and televisions,but also put brakes on the expansion plans of India Inc.

“There are mainly two factors behind this lowering of core inflation. First,the aggressive rate hikes have cooled demand as the cost of capital rose. Also in the past one year,prices of non-oil commodities have actually declined,” said Sonal Varma,India Economist,Nomura Financial Advisory & Securities. The RBI could cut the repo rate by 25 basis points while leaving the cash reserve ratio (CRR) unchanged,she said. The repo rate,or the rate at which banks borrow from the RBI,has remained unchanged since October 2011 when the RBI last hiked it by 25 basis points to 8.5 per cent.

Inflation in items including metals,iron and steel and transport equipment and machinery has eased over the past few months. “Manufactured goods offer the best gauge of underlying or core inflation in India,since it is much less susceptible to swinging food or commodity prices. It suggests that underlying price pressures are indeed cooling in India,which is to be expected in an economy that is growing well below potential,particularly in manufacturing,” Glenn Levine,Senior Economist,Moody’s Analytics said in a research note on Monday.

Industrial output in February dipped to 4.1 per cent while the IIP data for January was revised downwards to a mere 1.1 per cent fueling fears that GDP growth for 2011-12 could be lower than the estimated 6.9 per cent.

“Easing inflation momentum coupled with the prevailing weak growth environment will push the RBI to cut the repo rate by 25 bps to 8.25 per cent in tomorrow’s policy review,” Deutsche Bank said in a research note.

Sunil Sinha,head and senior economist at rating agency Crisil agreed. “Non food manufactured inflation is a proxy for demand expectation and is the main target of monetary policy. Higher cost of capital has led to lower demand as well as growth in production of such goods. A 25 basis point cut in the repo rate is expected,” he said but pointed out that food and energy prices continue to be high.

Headline inflation eased to 6.89 per cent in March marginally lower than February’s 6.95 per cent. Prices of essential items like pulses,potato and milk remained disturbingly high and pushing food inflation to 9.94 per cent in March as against 6.07 per cent in February.

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