India hopeful of rate cuts despite marginal rise in inflation rate

Market analysts have blamed the marginal rise in inflation rate on the week-long strike called by over 40 million truckers in India on January 5, which caused shortages and hampered the transportation of food and manufactured products in many parts of the country.

However, the analysts are still hopeful that the general decline in India's annualized inflation rate, triggered by sharp cut in state-set domestic fuel prices, would give the central bank headroom to cut key interest rates.

"After a long time, inflation has surprised on the upside. Our hypothesis is that the nationwide truckers' strike could have caused a shortage in essential commodities and this price increase. Otherwise, the trend continues to be lower, due to falling commodity prices, input costs, and weakening demand, which is likely to prompt firms to cut prices to boost demand," said Sonal Varma, economist at Mumbai-based Nomura International.

"Inflationary pressures are diminishing and we expect the RBI to cut both the repo and reverse repo rates by 50 bps before March 2009," Varma added.

Agrees Jyothinder Kaur, economist at HDFC Bank in New Delhi. "I think it was mainly due to the impact of truckers' strike on prices of primary articles. And as a trend, it is not at all a concern. Inflation is going to come down anyway," Kaur said.

According to N.R. Bhanumurthy, economist at Indian Institute of Economic Growth, the inflation rate "is expected to come down below 5 percent by February."