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March Inflation Rate Seen Easing Marginally

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India's headline inflation probably declined to 6.4 per cent in March, the slowest rate in more than three years, but high food inflation remains a challenge for the Reserve Bank of India (RBI) as it ponders further rate cuts to revive Asia's third largest economy.

Reviving investment and economic growth remain the top priority of Prime Minister Manmohan Singh's government, which is gearing up for national elections due in early 2014. India's persistently high food prices irritate voters and have tempered economists' expectations of aggressive monetary easing.

Wholesale prices, India's key inflation measure, likely cooled a tad to 6.40 per cent in March after an annual uptick to 6.84 per cent in February, according to a Reuters' poll of economists. The March number is due to be released later on Monday.

Retail food prices rose at a slightly slower pace in March, data released last week showed, but were still up 12.46 per cent - a sharp increase at a time economic growth is hovering close to the lowest level in a decade.

The RBI responded to a slight cooling in headline inflation in recent months with two 25 basis point cuts this year to bring the benchmark repo rate to 7.50 per cent in a bid to revive growth. Economists are divided over whether the bank will risk another small cut in borrowing costs next month.

"On the monetary side, the RBI may pause in its next policy (meeting) on May 3, given the elevated inflationary expectations and sharp widening of the current account deficit in the December quarter," said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody's.

The current account deficit has re-emerged as India's weakest economic spot after leaping to an all-time high of 6.7 per cent of GDP in the December quarter. A high current account deficit is potentially inflationary because it can lead to a weaker currency and more expensive imports.

RBI governor Duvvuri Subbarao last week said that further rate cuts will depend on inflation easing further. In March, he said inflation must drop to 4-6 per cent, and that levels above such a range demanded policy tightening.

The analysts polled by Reuters said they expected headline inflation to remain above 6 per cent in all quarters to June 2014, averaging 6.5 per cent for the fiscal year 2013/14.

"WPI inflation is likely to remain between 6 per cent and 6.5 per cent for the next quarter," Nayar said, citing rising costs for diesel and electricity.

Relief Ahead?
Data on Friday showed that annual consumer price inflation marginally eased to 10.39 per cent in March from the previous month, but remained the highest among the BRICS group of emerging economies - Brazil, Russia, India, China and South Africa.

Morgan Stanley said in a research note on Thursday that India's retail inflation is expected to ease to around 7 per cent by March 2014 on account of the lagged impact of slower growth in state spending, and a slower rise in global commodity prices.

Finance Minister P. Chidambaram has an ambitious plan to lower the fiscal and current account deficits, while reviving growth, lowering inflation and pleasing voters ahead of the elections, where his party is aiming for a third consecutive term.

He stepped up spending for the rural poor in the February 28 budget, while promising to rein in fuel subsidies through a phased hike in diesel prices and a new programme of direct transfer of cash benefits to bank accounts aimed at reducing widespread fraud.

However, his plan partly relies on factors largely beyond his control, such as subdued crude prices and bumper crops to control inflation. He is visiting global financial centres to attract more capital inflows to meet the widening current account deficit.