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Inflating prospects PDF Print E-mail
Tuesday, 16 April 2013 00:32
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WPI at 39-month low augurs well for a rate cut

 

Given the collapse in India's GDP, it was just a matter of time before inflation started to fall and despite many projections, WPI for March is down to a 39-month low at 5.96%. But, critics of a rate cut argue, consumer prices are still too high at 10.4%. While this would be true if CPI were to remain at these levels, with services-GDP starting to slow, it is reasonable to expect core-CPI to also start falling over the next 4-5 months—indeed, manufacturing WPI (currently at below the RBI's comfort zone of 4% for the second month in a row) started falling only a few quarters after manufacturing GDP began slowing.

The important thing to note is that WPI has slowed the way it has despite the fuel sub-index (14.9% weight) being in double digits since February 2010—it was 10.2% in March. And even the current WPI is largely dominated by the 20% average inflation rate in cereals over the past few months due to rampant mismanagement of the food economy. If you remove food, inflation in manufactured products is down to just 5.4% in April-March FY13 as compared to 7.3% in the same period in FY12. There is now very little reason for RBI to not cut rates—repo by 25 bps and CRR by 50 bps in the next policy—and the fact that gold prices are at a two-year low and gold imports have fallen dramatically only makes this more compelling.

 
 

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