Rangarajan calls for a ‘wait and watch’ policy for a decision on interest rates

For the first time since November 2009, wholesale price index-based headline inflation slid further to 4.89 per cent in April this year from 5.96 per cent a month ago following a significant easing in food prices to enter the Reserve Bank of India’s (RBI) ‘comfort zone’ of a 4-5 per cent rise in prices.

With CPI (consumer price index) inflation also on a downtrend to a single digit, the marked pull-down in headline inflation during the month to over a three-year low as compared to 7.50 per cent in April 2012 brought more cheer to the authorities than discernible relief to the common man as the WPI data provided enough room to the government to pitch for a further cut in interest rates by the RBI to prop up investments and boost sagging growth.

Making out its case for a cut in rates when the monetary policy comes up for mid-quarter review on June 17, Department of Economic Affairs Secretary Arvind Mayaram said: “I think we need to look at statement made by RBI Governor during the last policy review where he had stated that RBI is closely monitoring inflation figures and if there is dramatic change in inflation figures then RBI will take that in to consideration during its next review…So, we do believe that RBI would look at this figure [WPI inflation slipping below 5 per cent in April]”.

As per the official data released here on Tuesday, inflation in food articles, which accounts for a 14.34 per cent share in the WPI basket, eased to 6.08 per cent in April 2013 from 8.73 per cent in the previous month. Inflation in the fuel category also stood pegged lower at 8.84 per cent against 10.18 per cent in March on a year-on-year basis.

In particular, the fall in food inflation was mainly owing to a sharp decline in vegetable prices. The WPI data showed that inflation in the vegetable segment contracted further to (-) 9.05 per cent in April from (-) 0.95 per cent a month ago. Alongside, inflation in fruits eased to 0.71 per cent during the month from 4.71 per cent in March.

Subdued consumer demand

Significantly, manufacturing inflation slipped further to 3.41 per cent from 4.07 per cent to provide a pointer to subdued consumer demand and a marked slack in production activities. Little wonder that India Inc. has been clamouring for more affirmative action on rate cut by the apex bank.

However, a worrying factor is that the provisional figures on inflation tend to be revised upwards, as in the case of February which now stands revised up to 7.28 per cent from 6.84 per cent estimated earlier.

Commenting on the WPI numbers, Planning Commission Deputy Chairman Montek Singh Ahluwalia harped on the inflation tolerance level of the country.

“The pressure on inflation is softening and I expect it in the next few months, we will continue to see that [declining trend]...It [4-5 per cent] is [an] acceptable level of inflation.”

Prime Minister’s Economic Advisory Council Chairman C. Rangarajan, however, called for a “wait and watch” policy for a decision on interest rates.

“We can watch and see for one more month on what is happening to inflation. If inflation persists in the direction in which it has been moving, then it certainly gives more space to monetary policy,” he said.

As always, as in the recent past, industry chambers argued in favour of a rate cut which is expected to work as a catalyst for improving investor sentiment.

Federation of Indian Chambers of Commerce and Industry (FICCI) President Naina Lal Kidwai said: “The softening in inflation should give more space to RBI to consider further rate cuts. This is important, given the fact that the lending rates have not really come down despite a 1.25 per cent cut in repo rate between April 2012 and May 2013.”

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