The Reserve Bank of India (RBI) will be looking closely at the September data for signs of easing pressure on the price line before it takes a call on interest rates later this month. Since April, when it lowered overnight interest rates for banks, monthly wholesale inflation has stayed above 7.5%. Over this period, food prices have decelerated from 10.92% in April to 7.86% in September. But inflation in manufactured products has been on a secular uptrend from 5.27% to 6.26%. Core inflation — minus the more volatile food and energy prices — is what central bankers track for signs of reviving demand.
The government would like an interest rate cut to shake the economy out of its torpor. The gross domestic product grew a paltry 5.5% in April-June, with the slowdown cutting across agriculture, industry and services. Finance minister P Chidambaram hopes his assurances of fiscal correction will convince the RBI to cut interest rates that have choked productive investment. The RBI has repeatedly warned the government that unless it controls expenditure, principally subsidies like those on diesel, the prospects of a lower interest rate regime diminish. The October 30 review of credit policy will reveal whether the central bank is buying the government’s argument.