Headline inflation in the month of December as measured by the whole sale price (WPI) index stood at 47.7 per cent, lowest in two years. This is the first clue about the RBI's likely action in its forthcoming policy review on January 24.
“We were honing in on a March rate cut but this latest inflation cooling may give the RBI sufficient reason to move before then. The Indian economy is slowing sharply and with inflation coming off its peaks, there’s no reason for the RBI to continue sitting on their hands. We are looking for an initial rate cut in February”, said Glenn Levine, Senior Economist, Moody's Analytics (Australia).
Levine told NDTV Profit that they expect the WPI inflation to ease towards 6.5 per cent by mid-2012. “Inflation in India seems to have been driven more by domestic food prices, which are independent of the currency. Hence, It is hard to see the co-relation between the falling rupee and inflation,” he said.
Below is the complete interview.
Q: How closely have you been tracking the inflation numbers? Will there be tougher rate action from the RBI?
A: It may not come in this month. Inflation has come off quite significantly. This will come as a comfort for the central bank. We have been expecting a rate cut around March.
Q: You have been quite pessimistic on the growth picture. Are you expecting a policy reversal? What do you think they should do? Will there be an action on the cash reserve ratio front?
A: The central bank should have cut rates in December but the only fact that prevented them from doing so was that they raised rates in October. We expect the bank to cut rates in February. Given the sharp deterioration in the Indian economy and the dire outlook, I really can’t see anything that could lift growth above the expectations. Hence, we have not revised our forecast on India yet.
Q: The RBI was also worried about the rupee depreciation, appreciating global commodity prices. How much these two issues factor in as we go ahead?
A: The rupee has been falling since 12 months and thus, it is hard to see the co-relation between the two. Inflation seems to have been driven more by domestic food prices, which are independent of the currency.
Rising commodities are always a risk. The central bank will be monitoring them. But they should really not be worried about inflation at the moment.