Inflation at 43-month low of 4.7%; scope for rate cut by RBI

Inflation at 43-month low of 4.7%; scope for rate cut by RBI New Delhi: Declining prices of manufactured goods helped inflation ease to three-and-a-half year low of 4.7 percent in May, providing leeway to the Reserve Bank to cut interest rates in its policy review on Monday so as to spur growth.

Falling for the fourth straight month, inflation reached the lowest level since November 2009 when it was 4.50 percent.

Inflation based on the Wholesale Price Index (WPI) stood at 4.89 percent in April. In May 2012, it was 7.55 percent.

Inflation in food articles category, which has 14.34 percent share in the WPI basket, however, rose to 8.25 percent in May. It was at 6.08 percent in April.

Manufacturing inflation declined to 3.11 percent in May from 3.41 percent in April.
Commenting on inflation figures, Planning Commission Deputy Chairman Montek Singh Ahluwalia said it indicates a distinct downturn on inflation which is welcome.

"They (RBI) should certainly consider it because it is very clear that the underline inflationary pressure is softening," he added.

Industry chamber Ficci demanded that RBI should consider a rate cut and persuade banks to pass on rate cut benefits to borrowers. "With the downward trend in the prices holding on, RBI can consider a cut in the policy rate in the forthcoming monetary policy review," it said.

Commenting on inflation numbers, Finance Ministry officials said they want lower interest rates and monetary policy transmission.

Analysts, however, were of the view that it may be difficult for the Reserve Bank to cut rates in view of the sharp decline in the value of the rupee against the US dollar.

Inflation for March, meanwhile, has been revised downward to 5.65 percent from 5.96 percent as per provisional estimates, as per the official data release today.

Inflation in non-food articles category, which include fibre, oil seeds and minerals, saw a sharp decline in the rate of price rise to 4.88 percent, from 7.59 percent in April

ICRA Senior Economist Aditi Nayar said: "With mounting concerns related to the size and financing of the current account deficit in April-June quarter we expect the RBI to desist from monetary easing in the upcoming policy review, in spite of the persistent weakness in industrial growth."

The industrial output grew at a meagre 2.3 percent in April.

While the Reserve Bank has lowered interest rates by 1.30 percent since January 2012, the banks have cut lending rates by only 0.30 percent.

"If rupee stabilises, growth concern could come to force again and the RBI may cut policy rates by about 0.50-0.75 percent during the full fiscal," HDFC Bank Economist Jyotinder Kaur said.

As per the WPI data, rise in food inflation was on account of increase in prices of onions, vegetables, cereals and protein- based items.

Inflation in vegetables was 4.85 percent in May, against (-)9.05 percent in the previous month.

The rate of price rise in onion was high at 97.40 percent for the month, as against inflation rate of 91.69 percent in April.

For the fuel and power category, it was lower at 7.32 percent in May as compared to 8.84 percent in April, 2013.

Data released earlier this week showed retail inflation falling to a 15-month low of 9.31 percent in May.

PTI