The Reserve Bank of India will need further proof that inflation has been tamed before it can start reducing policy rates, according to Moody's Analytics.

The growth side of the economy has cooled, but inflation remains elevated, leaving the RBI in a tight spot, Moody's Analytics said in a research note issued after the announcement of India's headline inflation for March.

The research firm said that it had always maintained that RBI should have begun lowering rates to shore up the economy's demand side. But it is not so simple for the central bank, which raised rates aggressively in 2010 and 2011 to counter inflation, the note said.

India's wholesale price index-based inflation eased only slightly in March to 6.9 per cent from 7 per cent last month. This was in line with expectations and confirms that India is likely to face elevated inflation throughout 2012.

India is likely to have an inflation problem for the rest of 2012, as headline WPI growth cooled only slightly during March, in line with expectations, Moody's Analytics has said.

The strong March figure was largely due to an acceleration in food price inflation, with vegetable prices surging from a year ago. Fuel prices continued to ease in March, but may not cool much more in the coming months as global oil prices have risen and the rupee remains weak – much depends on whether the Government will allow the final prices to reflect these global dynamics.

Also, March is the fourth straight month in which prices of manufactured goods, which account for two-third of the index, have eased. It suggests that underlying price pressures are indeed cooling in India, which is to be expected in an economy that is growing well below potential, particularly in manufacturing.

This trend is likely to continue in the coming months, as there is no sign of a demand recovery on the horizon, it said.

>krsrivats@thehindu.co.in

Related Topics
comment COMMENT NOW