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Monday, April 16, 2012

Inflation at 6.89%. Is this RBI’s best chance of cutting rates?
Since, March inflation came down at 6.89% versus 6.95% in February, 2012, I am pretty sure that RBI would go for a Repo/Reverse Repo cut tomorrow.  This time the governor might use his discretionary powers if necessary....
The wholesale price index (WPI) for March has come in at 6.89 percent, above market expectations and only slightly below February’s reading of 6.95 percent.
The question on everyone minds, of course, is will the number allow the Reserve Bank of India to cut the main policy rate— repo rate — tomorrow?
First, the good news. Core inflation – or inflation of manufactured products – declined for the fourth month in a row to 4.87 percent. Manufactured products has a weight of 65 percent in the WPI. Given that the biggest component of the index is showing a falling trend, the bets have increased that RBI governor D Subbarao will at least announce a 25 basis point cut in the repo rate, which will be the first such cut in three years. (100 basis points = 1 percentage point).
Experts believe that tomorrow offers the RBI the best chance of cutting the repo rate, given that inflation seems set to shift into a higher orbit in coming months.
Now, the bad news. Food inflation is close to hitting double-digits again: prices of food articles jumped to 9.94 percent from 6.07 percent the month before. Food articles account for 14 percent of the WPI.
Earlier, the falling prices of fruits, vegetables, onions and potatoes had led to a sharp decline in food inflation. Now, vegetable and potato prices have started rising again; only onion, fruit and wheat prices are declining, which collectively account for a mere 3.4 percent of the WPI. According to some recent media reports, even the prices of fruits could take a U-turn in coming weeks.
Fuel prices also remain in double digits, although the pace of the rise slowed to 10.41 percent from 12.83 percent in February. But given high global prices and a weakening of the rupee against the US dollar (the local currency hit a three-month low of 51.65 against the greenback on Monday), a fuel hike is definitely in the offing.
So, what’s the forecast? Overall, experts on CNBC TV18 believe that tomorrow offers the RBI the best chance of cutting the repo rate, given that inflation seems set to shift into a higher orbit in coming months.
The RBI has already missed the bus once on cutting the repo rate when inflation fell to 6.56 percent in January. While not exactly the ideal economic situation to cut rates, this may very well be the only chance Subbarao gets to trim the repo rate in the current quarter, even as a token gesture to boost economic growth.
Of course, nothing in Subbarao’s past history suggests that he does anything as a token gesture.
Yet hope floats.

Courtesy: First Post
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