After raising the headline inflation projection twice in this financial year, the central bank is likely to reduce its March-end inflation estimation to below seven per cent. It had predicted 7. 5 per cent in the second quarter review of monetary policy in end-October. The Reserve Bank of India (RBI) will announce its mid-quarter monetary policy review on Tuesday.
According to market participants, the central bank might draw comfort from stable global commodity prices and easing core inflation.
“Stable global commodity prices, a range-bound exchange rate and declining pricing power of the corporate sector — all these factors should bring down inflation below seven per cent by March,” said Samiran Chakraborty, India chief economist and regional head-research, Standard Chartered Bank.
During the annual policy review in April 2012, RBI had projected a 6.5 per cent wholesale price index-based (WPI) inflation for March-end. This was revised to seven per cent during the first quarter review in June and then to 7.5 per cent during the October policy review.(CHANGING PARAMETERS)
While this has been revised upward, RBI has cut the growth forecast for 2012-13 from the 7.3 per cent projected in April to 5.8 per cent in October.
The inflation trajectory softened in December, coming down to 7.18 per cent, its lowest level in three years as compared to 7.24 per cent in November. Inflation, however, stayed much above the central bank’s comfort zone of 4.5–five per cent.
“The inflation readings have been a bit mixed but are generally a bit more encouraging. Headline WPI inflation held steady in December but core inflation eased further. CPI (consumer price index-based) inflation, on the other hand, rose but core CPI inflation was steady. HSBC PMI (purchasing managers’ index) readings for input and output prices have also eased since the last policy meeting,” said Leif Eskesen, chief economist for India & Asean, The Hongkong and Shanghai Banking Corporation.
The declining inflation trajectory has given hope to the market for a rate reduction during the policy review. RBI has not reduced the repo rate since the April policy meeting.
“RBI has clearly teed up for rate cuts, banking on an easing of inflation in coming quarters, fiscal consolidation commencing and structural reform implementation continuing. But, it is likely to tread very carefully, given the lingering inflation risks, limiting the policy rate cut to 25 basis points,” said Eskesen.