Inflation at three-year low; rate cut hopes rise

A vendor works at his vegetable stall at a wholesale fruit and vegetable market in Mumbai. India’s headline inflation probably declined in March.Agencies/New DelhiIndia’s inflation yesterday slipped below 6% for the first time in nearly three-and-a-half years, marking the first good economic tidings for the embattled Congress-led government in months. The Wholesale Price Index, India’s cost-of-living benchmark, fell to 5.96% in March from a year earlier, far undershooting market estimates that inflation would be around 6.4%. The unexpectedly low rate, which came on top of a string of weak industrial output and other economic activity numbers, fanned expectations among economists of another interest rate cut to revive a stumbling economy. This “is likely to provide the green light” for a further rate cut at the central bank’s next policy meeting on May 3, said Credit Suisse economist Robert Prior-Wandesforde. The figures came as a boost to the government which has been buffeted by a spate of corruption scandals and a sharply slowing economy, and is keen to reduce inflation before facing voters in elections due in 2014. The March inflation figure was down almost a percentage point from 6.84% the previous month and stood at the lowest level since November 2009. But economists cautioned that a record high current account deficit, the broadest measure of trade, and elevated food prices meant the Reserve Bank of India could only cut its lending rate in small quarter-point steps and not more aggressively. The encouraging inflation data was released as Finance Minister P Chidambaram was set to begin a series of roadshows in North America aimed a drawing billions of dollars of investment. Foreign investment inflows are needed to help fund the gaping current account deficit that has emerged as a worrying faultline in Asia’s third largest economy. Business lobby groups have been demanding big cuts to revive investment and demand. The RBI needs to ease “interest rates by at least 100 basis points in the current fiscal year,” S Gopalakrishnan, the new president of the Confederation of Indian Industry, the nation’s leading industry lobby, told reporters. “Odds for a rate cut in May have risen after today’s numbers,” said Radhika Rao, an economist with DBS in Singapore. “The RBI will be in a tough spot as the recent deterioration in the current account position warrants rates to be left high to cool the economy, though the softer inflation numbers provide a window to ease with an eye on supporting the faltering growth outlook,” Rao said. The central bank has already cut lending rates twice by 25 basis points since the start of 2013 to jumpstart an economy growing at 5%, its lowest level in a decade. But even with the reductions, the bank’s benchmark lending rate to commercial banks stands at a relatively elevated 7.5% and the cheapest consumer loans are running at around 10%. The lower-than-expected headline inflation briefly buoyed the stock and bond prices as investors read it as a sign the central bank was more likely to cut rates when it next reviews policy on May 3. The markets’ gains, however, were shortlived as investors reacted to an upward revision to January inflation to 7.31% from 6.62%. The benchmark 30-share index immediately extended gains to stand up 0.5% from 0.3% before the data was released, but fell back on the January revision. India’s benchmark 10-year bond yield initially dropped 3 basis points to 7.82% on the March inflation data, but the revision to January prompted investors to trim their positions.