India hopeful of rate cuts despite marginal rise in inflation rate

A year ago, the inflation rate stood at 4.45 percent.

According to government data released last Thursday, food articles, jet fuel and food products drove up the wholesale price index-based (WPI) inflation rate.

The index for the Primary Articles Group (which has a weight of 22.02 percent on the WPI or Wholesale Price Index) declined by .1 percent compared to the previous week on account of percentage decline in the indexes for food articles group (down 0.1 percent), non-food articles group (down 0.2 percent) and minerals group (down 2.6 percent).

However, the index for food articles group advanced by 0.1 percent.

Items that witnessed decline in prices were fish-marine (down 2 percent), gram and condiments & spices (down 1 percent each), raw rubber, rape & mustard seed and sunflower (down 1 percent each), limestone (down 52 percent) and magnesite (down 34 percent).

However, prices of maize (up 2 percent), rice, bajra and jowar (up 1 percent each), niger seed (up 6 percent), castor seed (up 4 percent) and fodder (up 2 percent) surged.

The index for Fuel, Power, Light & Lubricants Group (which has a weight of 14.23 percent on the WPI) rose by 0.1 percent compared to previous week due to higher prices of aviation turbine fuel or jet fuel (up 4 percent) and furnace oil (up 1 percent).

The index for Manufactured Products Group (which has a weight of 63.75 percent on the WPI) advanced by 0.3 percent compared to previous week on account of higher prices in the following index groups: food products (up 1 percent), beverages, tobacco & tobacco products (up 0.6 percent), textiles (up 0.1 percent), chemicals & chemical products (up 1 percent) and basic metals alloys & metal products.

However, prices of items such as paper & paper products softened by 0.3 percent, non-metallic mineral products slipped by 0.1 percent, machinery & machine tools moved down by 0.3 percent and transport equipment & parts tumbled by 0.2 percent.

Some of the items to witness major decline in prices were unrefined oil (down 7 percent), imported edible oil (down 5 percent), rice bran oil (down 2 percent), groundnut oil and khandsari (down 1 percent each), steel ingots (down 6 percent), zinc ingots (down 2 percent) and cement.

However, the prices of products such as oil cakes (up 5 percent), gur (up 2 percent and sugar (up 1 percent), beer & alcohol (up 25 percent), soft drinks (up 1 percent) and zinc (up 10 percent) witnessed increases.

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."

"Marginal increase in inflation is not an issue. The Reserve Bank should now cut interest rates, may be marginally by 25 basis points, to send a signal that interest rates have not bottomed out," he said.

"Higher inflation this week is mainly due to the lagging effect of the truckers' strike and it should cool down again in coming weeks," said D.K. Joshi, principal economist at domestic ratings agency CRISIL.

According to Joshi, "the trend for inflation continues to be decisively downwards and the effect of the fuel price cut should be seen in the next 2-3 weeks."

The central bank may lower interest rates "anytime soon," said Rajeev Malik, an economist at Macquarie Capital Securities in Singapore. "The growth momentum in the next two to three quarters will continue to worsen," he added.

In January, the Reserve Bank of India (RBI) had slashed both its short-term lending rate or repo rate and the reverse repo rate (the rate at which the central bank absorbs excess cash from the system) by 100 basis points (bps) each, effectively bringing down the key interest rates to 5.5 percent and 4 percent respectively.

The cash reserve requirement (cash reserve ratio or CRR or the proportion of deposits banks need to keep with the central bank) was also brought down by 50 bps to 5 percent.

Since mid-September 2008, prompted by falling prices of fuel, agricultural commodities and metals, RBI has taken steps to inject actual or potential liquidity of over Rs.388,000 crore ($80 billion) into the banking system for the purpose of credit expansion.

In recent months, the India government has also announced fiscal measures including duty cuts, opening the corporate bond market to more foreign investment, easing overseas borrowing rules and promising more capital to state-run banks in its effort to arrest rise in inflation and boost economic growth.

India's economy had grown at a robust annual rate of 9 percent or more for the past three years but global financial groups like Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley and Nomura, in recent months, have lowered their estimates for India's GDP growth for the current fiscal year ending March 2009 to 6.5-7.5 percent.

Last Wednesday, the International Monetary Fund (IMF) revised down growth projections for India, Asia's third-biggest economy, to 5.1 percent in calendar 2009 from 6.3 percent.

Analysts claim that economic growth of 5-5.5 percent is almost near a recession-like situation as far as India is concerned.