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Wholesale inflation at 3-yr low, raises hopes of cheaper loans

business Updated: Apr 16, 2013 00:41 IST
HT Correspondent

India's wholesale prices-based inflation rate fell to 5.96% in March - the lowest in more than three years - triggering expectations that the Reserve Bank of India (RBI) will slash interest rates in its monetary policy review next month. This may, in turn, lead to cheaper home and auto loans.

The latest data released Monday will likely bring cheer for the UPA government caught in a tug-of-war between rising prices and sliding economic growth, and struggling to boost its political stock amid a string of corruption allegations.

Wholesale price index (WPI)-based inflation rate - India's most watched cost-of-living index - stood at 5.96% in March, down from 6.84% the previous month and 7.69% in the same month last year.

Food inflation, which carries a 14.34% weight in the overall WPI basket, fell to 8.73% in March from 11.38% in February, pulled down by lower vegetable prices.

"Inflation behaviour is consistent with what the government has been saying - that it is slowly coming under control," Montek Singh Ahluwalia, planning commission deputy chairperson, said.

The sharp decline in WPI inflation, the lowest since December 2009 when it stood at 4.95%, comes on the heels of a moderation in March consumer-price index (CPI) inflation - a more realistic index as it captures shop-end prices - announced last week. The CPI inflation stood at a four month low of 10.39%.

The RBI is widely expected to cut lending rates in its review meeting on May 3 as India's key currency administrators and macroeconomic managers seek to jumpstart the economy that is estimated to have to have crashed to a decade-low growth of 5% in 2012-13.

"The better-than-expected WPI data therefore cements the case for a further 0.25 percentage point reduction in the repo rate perhaps in RBI's next policy review on May 3," said Richard Iley, chief Asia economist, BNP Paribas.

The bank has already cut the repo rate - its key lending rate - twice since January and business leaders have been ratcheting up their demand for a repeat action.

The repo rate, the rate at which RBI lends to commercial banks, now stands at 7.5%.

A lower repo will bring down banks' borrowing costs, which in turn, may prompt them to slash interest rates for final home, auto and corporate borrowers.

"A cut in interest rates at this juncture is critical as industrial growth continues to remain sluggish as corroborated by the industrial output data released last week," said Naina Lal Kidwai, president of industry chamber Ficci.

India's factory output crawled at 0.6% in February, proving fears of a widespread slowdown as factories and farms are producing less, exports are shrinking, companies are offering fewer jobs and prices continue to remain high.

Elevated prices over the last 12 months have hurt family budgets hard, especially at a time when thousands of factories and firms in India, squeezed by costly input and borrowing costs, have offered meager salary hikes and are holding back on expansion and hiring.