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Inflation likely slowed slightly in April: Reuters Poll

Source : REUTERS
Last Updated: Mon, May 14, 2012 04:11 hrs
A harvester is used to deposit paddy crop in a tractor trolley on a field in the outskirts of the western Indian city of Ahmedabad

India's inflation rate probably eased only slightly in April, held firm by food prices, underscoring the RBI's stance that it had little room for further rate cuts, a Reuters poll found.

The median consensus from a survey of 27 economists forecast the wholesale price index, India's main inflation gauge, rose 6.70 percent in April versus a year ago.

This is a tad slower than the average rate of 6.91 percent in the last three months, and significantly lower than the 9.52 percent average through 2010 and 2011.

Still, prices have yet to cool enough to bring the inflation rate down to the Reserve Bank of India's (RBI) commonly perceived comfort zone of around 5 percent.

In fact, inflation might have cooled at a faster rate in April had food price pressures not been so strong, mainly due to se asonal su pply constraints, economists said.

Rising temperatures and inadequate water supply result in shrinking fruit and vegetable production during summer months, and storing farm produce for long periods in the hot and humid climate adds to difficulties.

This, along with ever-increasing demand for food from the country's growing 1.2 billion population, leads to shortages.

"If you are looking at food inflation rate of 8 to 9 percent persisting throughout, it's unlikely that headline inflation will drop to 4 to 5 percent unless there is a severe fall in manufactured goods prices," said HDFC economist Jyotinder Kaur.

Manufactured products make up for a little less than two-thirds of the wholesale price index, while food accounts for around 14 percent but tends to have a significant impact on the direction of overall inflation because it's so volatile.

The wholesale inflation rate, however, is not indicative of prices consumers actually pay. India only began releasing the consumer price index from February, which is still outside the central bank's radar.

In March, the CPI rose by 9.47 percent on a year-on-year basis, faster than February's 8.83 percent rise.

BETWEEN A ROCK AND A HARD PLACE

This has put the RBI in an unenviable position as it finds itself trapped between curbing inflation and trying to shore up growth, which has slumped to a three-year low.

India's economy, once a key driver of growth in Asia, has slowed considerably. Growth forecasts have been downgraded by economists for the fifth straight quarterly Reuters poll.

To fight inflation, the RBI aggressively hiked interest rates 13 times between March 2010 and October 2011, taking its benchmark repo rate to 8.50 percent. It managed to get inflation down somewhat, but choked economic activity while doing so.

With growth slowing, the RBI cut rates for the first time in three years at its April meeting by a sharper-than-expected 50 basis points, bringing the repo rate down to 8.00 percent.

Even so, the RBI's monetary policy stance, which is yet to shift the spotlight to boosting growth from curbing inflation, remains removed from that of its emerging market peers.

The Brazilian central bank's Copom, its monetary policy committee, cut its key interest rate for the sixth straight month since August, bringing rates to a near-historic low of 9 percent in April.

It even hinted the central bank in Latin America's largest economy will not shy away from further rate cuts, to revive growth, despite inflation remaining above the midpoint of the official target.

In contrast, the RBI at its April meeting warned that it had little room to cut rates again in the short term, mainly due to fears inflation would rise again.

However, economists expect the RBI to cut its repo rate by 50 basis points by March 2013, with the first move expected only in the July-September quarter.

"Further rate cuts, if at all they happen, will be because of discomfort with growth and not with comfortable inflation," said Quant Capital economist Bhupesh Bameta.

"Inflation is going to remain a medium-term problem."



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