The Reserve Bank of India (RBI) may not reduce interest rates any time soon, despite the slowdown in growth and easing of inflation.
RBI Governor D Subbarao today said inflation was still running high. According to market participants, the message is RBI will not drop its guard on inflation by cutting the repo rate (at which it lends to banks) before the last quarter of this financial year.
Wholesale price index (WPI) inflation for the month of October eased marginally to 7.45 per cent from 7.81 per cent the previous month. However, economists believe this could be revised upwards.
The inflation data, along with weak factory output data, had raised hopes that RBI would consider a rate cut on December 18 during the mid-quarter policy meeting. Instead, the 10-year bond yield rose 1 basis point to 8.20 per cent following Subbarao’s comments, as investors pared back some of that optimism.
“We are always on high alert, high alert about growth, about inflation certainly,” news agencies quoted Subbarao, who was interacting with reporters on the sidelines of a conference in Pune. He added that inflation at 7.5 percent was “still quite high”.
After a gap of three years, the central bank reduced interest rate in April. But RBI is in a pause mode since then, as prices remain stubbornly high.
Growth has been slowing down, as the Index of Industrial Production (IIP) during September surprised by reporting a fall of 0.4 per cent year-on-year. At the same time, the IIP for August was revised downwards to 2.3 per cent, compared with an estimate of 2.7 per cent growth previously. Gross domestic product (GDP) growth for 2012-13 was revised downwards to 5.8 per cent from 6.5 per cent in July. “WPI inflation has remained above RBI’s comfort zone of 5-5.5 per cent for the past 35 months now,” said Upasana Chachra and Chetan Ahya of Morgan Stanley in a report released on Friday.
While provisional WPI inflation for October has decelerated to 7.45 per cent, the trend of revision in the past months indicates that the final number could be closer to 8 per cent. Indeed, we expect WPI inflation to accelerate to around 8-8.2 per cent by December, before it moderates to around 7-7.5 per cent level by March,” said Upasana Chachra and Chetan Ahya of Morgan Stanley in a report released today.
Earlier, Subbarao had said that he expected price pressures to ease only in the first part of 2013, indicating that any cut in interest rates would come at the earliest in January. In the second-quarter review of the monetary policy, the RBI had raised the projection of WPI inflation for March 2013 to 7.5 per cent from 7 per cent indicated in July.
Of late, the RBI has faced pressure from the government and industry to bring down the repo rate, which currently stands at 8 percent.