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India's continuing run of bad news on the economic front persisted on Monday. The headline inflation for April hit 7.23 per cent, much higher than the 6.89 per cent recorded the previous month.
The inflation numbers, coming on the back of the sharp decline in industrial output in March, spooked the markets, with the benchmark BSE Sensex declining for the fifth day in a row to close at 16,215.84, its lowest level in four months.
Analysts said market sentiment was also hit by credit rating major Moody's downgrading three major banks, as well as grading index heavyweight Reliance Industries Ltd (RIL) as credit negative on lower gas output projections. The move sent RIL down 2.39 per cent closing on the BSE at Rs 680.6 a share. The Nifty ended close to the psychological 4,900 point mark, ending the day at 4,907.8 points.
Analysts said rising inflation levels — core inflation edged up to five per cent — left little room for the RBI to cut interest rates to spur growth.
Though the April inflation number was lower than the 9.74 per cent recorded in the same month last year, both the Finance Minister, Mr Pranab Mukherjee, and the Prime Minister's Economic Advisory Council (PMEAC) Chairman, Dr C. Rangarajan, expressed concern.
Terming the latest WPI number as an “uncomfortable statistic”, Dr Rangarajan said this has diminished scope for further monetary easing by the RBI for now. “The possibility of lowering interest rates can be thought of only when interest rates show signs of easing,” he added.
The RBI had since March 2010 raised policy rates by 375 basis points to tackle inflation, but gave in to growth concerns last month by cutting its repo rate by 50 basis points.
Mr Mukherjee said that food inflation at 10.49 per cent was “a matter of concern”. “Food inflation can be tackled by creating storing facilities and bringing in institutional reforms in agricultural marketing,” he said. In both the areas, State governments have to take appropriate steps, he added.
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