EXPECTATIONS RUN HIGH FOR RATE CUT
By Ruma Dubey
So expectations take further wings – will RBI cut only 25 bps on 29th Jan? The market has now assumed that a rate cut is for sure based on today’s released WPI number.
December WPI came in at 7.18% v/s 7.24% in November, a marginal decrease, nevertheless a fall. The market was especially enthused with manufacturing inflation, which came in at 5.04% v/s 5.41% in Nov but food inflation was sharply up at 11.16% v/s 8.5% in Nov . And this sharp rise in food prices remains a matter of concern. It is these food prices which spiked up the CPI or retail inflation to 10.56% v/s 9.9% in November.
Thus on one hand we have the lower WPI and on the other, a much higher CPI; two contrasting numbers. And what will RBI follow? RBI has been stating all along that it’s prime concern in inflation and that is throwing up a somewhat mixed picture currently. It remains a concern. But at the same time, growth rate is low, with Nov showing a de growth of 0.1%. If RBI considers both these aspects together, then maybe the case gets stronger for a rate cut.
Growth has in fact bottomed out and consumption is slowing picking up. CRISIL has put out a report stating that a revival in consumption will push up the GDP to 6.7% in FY14 as against the expected 5.55 in FY13. And a revival in consumption means more demand for goods, more production and thus inflation will only go up. It expects headline inflation at around 7.7% for current fiscal and around 7% in FY14.
Fuel prices remain a bone of contention and any price hike which has to happen, will happen in the coming months itself and not in 2014 which is an election year. But in the near future, a hike in fuel prices means a surge in overall prices. Fuel makes up for 15% of the WPI basket and hike in petrol, coal and electricity prices will pump up headline inflation.Apart from fuel prices, we need to keep a watch on Food Security Act. If that gets implemented in the Budget, which in all likelihood it will given the elections round-the-corner, then we can see a spike up in food inflation too.
Thus under the current circumstances, we can rejoice the Dec inflation if we decide to just live for the day. But if we want to be more pragmatic and show foresight, the coming months do seem challenging on the inflation front.
Yet, RBI has held on to the rates for too long. It needs to now get the rates down to boost consumption. The consensus is that a rate fall is a given but would it be just a token 25 bps for sentimental reasons or would it be a sharp 50-75 bps is what one needs to wait and see.