Just a couple of weeks ago the central bank was talking of how “the space for action for 2013-14 remains very limited” and, while it cut repo rates by 25 bps, its refusal to cut the CRR ensured little or no transmission of the rate cuts. In other words, it looked as if RBI itself was unconvinced of the need to cut interest rates. While we had pointed out then that RBI’s hawkish tone of significant upside risks to inflation was accompanied by dovish facts—PMI at a 17-month low and GDP at a 15-quarter low—WPI has softened even further. April WPI is at a 41-month low of 4.9% and core WPI inflation is below 3%. The greatest fall, needless to say, is in primary articles where April’s 5.8% WPI compares with 7.6% in March, 10.5% in February and 11.4% in January. But more than food, the biggest driver of falling inflation rates is the demand destruction of several quarters—private consumption growth decelerated to a mere 4.1% in FY13, leaving India Inc with almost no pricing power.
Interestingly, while RBI’s policy statement had focused a lot on suppressed inflation—due to LPG and diesel subsidies, for instance—a Citibank analysis puts the suppressed inflation at around 230 bps today as compared to 400 bps a year ago. Whether even this will translate into real inflation, of course, depends upon a lot of factors. A further reduction in global commodity prices, for instance, could lower this even more. Keep in mind that, despite the subsidies on both LPG and diesel reducing over the past few months, the overall fuel index saw inflation levels fall from 12% in February to 8.7% in March and 6.1% in April as the prices of various market-determined fuels like petrol continued to fall.
While RBI is, at a macro level, right when it talks of demand-supply imbalances, the larger point is that the slowing of the Indian economy over so many quarters made it obvious it was just a matter of time before WPI began following suit. Indeed, with services GDP also slowing, even CPI will start slowing at a faster pace in the months ahead. Even when RBI’s policy came out on May 3, it was not quite clear what the central bank’s concerns were since, apart from depressed local conditions, there was little in the global economy to suggest any sudden reversal of commodity prices either. Hopefully, RBI will get enough time to study inflation trends and their determinants—both locally and globally—by the next policy in June. A repo rate cut without a CRR cut will remain a meaningless exercise.