Decline should spur RBI to cut rates, says India Inc

Led by softening food prices, inflation as measured by the Wholesale Price Index (WPI) cooled to an eight-month low of 5.05 per cent in January, providing some relief to the common man.

The WPI inflation in January is the lowest since May 2013 and significantly lower than the 7.31 per cent figure in January 2013.

It is also the second straight month of deceleration in inflation, which stood at 7.52 per cent and 6.16 per cent, respectively, in November and December 2013.

This moderation comes on the heels of Consumer Price Index (CPI) inflation hitting a two-year low of 8.79 per cent in January.

Lower food prices

The fall in WPI inflation was driven by a drop in prices of food articles, especially vegetables. Food-article inflation came in at 8.8 per cent, well below the 13.68 per cent in the previous month.

Encouraged by the good news, the benchmark Sensex rose 173 points to end the day at 20,366.82, its highest increase in four weeks. The index discounted the possibility of the Reserve Bank of India (RBI) not easing policy rates in the short term.

Core inflation still up

There was, however, no respite on the core inflation front, with the rate inching up to 3 per cent in January from 2.8 per cent in December 2013.

The moderation in WPI inflation is less significant from the RBI’s perspective as WPI is no longer on its radar.

Economists point out that the RBI will be driven only by CPI inflation movement in its policy response.

India Inc was quick to demand an interest rate cut by the RBI to boost investment sentiment and kick-start economic growth.

The falling trajectory of inflation should spur the RBI to revisit its monetary policy stance and cut policy rates to rejuvenate growth in the industry, which has been hit by high interest costs and flagging investment, said Chandrajit Banerjee, Director-General of the Confederation of Indian Industry.

FICCI President Sidharth Birla said there was a need to urgently revive growth in the manufacturing sector and lay special emphasis on resolving the problems of the medium and small sectors.

“Monetary policy driven boosts are one imperative even as we look forward to deeper reforms from the government to enhance capacities and competitiveness,” he said.

srivats.kr@thehindu.co.in

(This article was published on February 14, 2014)
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