Inflation back in RBI's comfort zone

Market hopes for more rate cuts as April headline number at 4.89% is the lowest since November 2009

The headline inflation fell to 4.89 per cent in April, within the Reserve Bank of India (RBI)’s comfort zone for the first time in almost three-and-a-half years, fuelling market hopes for more interest rate cuts to revive economic growth. RBI’s comfort level for inflation is between four and five per cent.

The Wholesale Price Index (WPI)-based inflation had been  5.96 per cent in March, an official release said on Tuesday. The fall of over a percentage point prompted the finance ministry, industry chambers and economists to clamour for monetary easing, even though RBI had said there was limited space for further reductions while reducing the repo rate by 25 basis points earlier this month.

While Economic Affairs Secretary Arvind Mayaram said he believed RBI would take the new inflation figure into consideration, HDFC Bank Chief Economist Abheek Barua said RBI would find the inflation number difficult to ignore and the bank expected a 25-bp repo rate cut in June, followed by possibly another 25-bps one over the rest of 2013. (Click on graphics)

A CRISIL Research analysis, however, said RBI seemed to be committed to bringing down and sustaining inflation at around five per cent before changing its stance.

The low number quickly sparked gains in the bond and stock markets, which ended flat after a nervous start following yesterday’s crash, while the rupee was little changed. The bond market rallied to a three-year high, with the benchmark 10-year bond yield dropping 11 basis points.

Inflation was mainly cooled by a moderation in food and fuel costs, helped by lower global commodities prices.

WPI-based inflation is currently at the lowest level since the 4.73 per cent of November 2009. It declined to below five per cent for the first time since then, even as the central bank had projected inflation to remain sticky at 5.5 per cent and committed itself to bringing it down to five per cent by the end of 2013-14.

Headline inflation was 7.50 per cent in April last year. Declining commodity prices, depressed demand and seasonal easing of food prices led to the fall in inflation, analysts said.

Data released yesterday showed Consumer Price Index (CPI)-based inflation declined to a 13-month low of 9.39 per cent in April, falling to single digit after four months. But the divergence between WPI and CPI inflation rates has been widening, instead of narrowing. This means the fall in WPI-based inflation is sharper, leading to increased margins for retailers.

Commerce Department data showed WPI-based inflation came down in almost every category, except items such as tobacco products and diesel.

Non-food primary (raw) items saw a year-on-year rise and month-on-month decline in inflation. Vegetable prices declined for a second month in a row. The fall was 9.05 per cent in April after a fall of 0.95 per cent in March.

As demand was lacklustre and commodity prices fell in global markets, core (non-food manufactured) inflation fell to a 39-month low of 2.74 per cent in April against 3.41 per cent in March.