India’s inflation rate fell to a two-year low of 7.47% in December pulled down by slumping food prices, but manufactured inflation continued to reign high, prompting economists to argue that Reserve Bank of India (RBI) may not slash interest rates at its monetary policy review next week.
Wholesale prices index (WPI) based inflation was 9.11% in November.Non-food manufactured goods inflation also eased to a 5-month low of 7.7% — it was 7.9% in the previous month — but it still remains elevated, largely driven by a sliding rupee that has made most imported raw materials costly and knocked up prices of many finished goods produced in India.
“The RBI, while framing its monetary policy, will have to take into account not only the decline in food inflation and headline inflation, but also factor in manufactured goods inflation,” Prime Minister’s Economic Advisory Council chairman C Rangarajan said.
The RBI has raised the repo rate — the rate at which bank borrow from the central bank — 13 times since March 2010 before signalling a pause last month. “There was never a strong case for a rate cut at the upcoming January 24 policy review, in our view,” said Rajeev Malik, senior economist broking and research firm CLSA. “We maintain that the RBI will likely cut rates after the budget.”
However, “a cut in the cash reserve ratio (CRR) should not be ruled out,” he said. CRR is the proportion of deposits that banks have to park with RBI. The government exuded confidence that inflation will fall to below 7% by March.
“Moderation in inflation would continue in the coming months though softening in the prices of manufactured goods despite the rapid decline in non-food primary inflation may be more gradual,” finance minister Pranab Mukherjee said.