November inflation eases down to 7.24%; re-ignites rate cut hopes

After rising to the highest level in the year for the month of September, the wholesale price index (WPI), India's main inflation gauge, in a big relief, unexpectedly cooled down to 7.24% (Provisional) for the month of November, 2012 as compared to 7.45% for October and 9.46% during the corresponding month of the previous year, thereby registering second consecutive decline. However, the annual reading for the month of September was revised sharply higher to 8.07% from earlier of 7.81%.

Re-igniting the hopes of rate-cut from Reserve Bank of India (RBI), in its upcoming monetary policy review on December 18, 2012, the figures were way below the consensus estimates of 7.6% figure for the month of November. Build up inflation in the financial year so far was 4.84% compared to a buildup of 5.28% in the corresponding period of the previous year.

The pleasant surprise came in from the index for Manufactured Products, which carries weight of almost 65% in the index, which rose tad by 0.1% to 148.0 from 147.9 for the previous month. The index for ‘Food Articles’ group rose by 0.6% to 166.7 from 166.7 in the previous month.

Meanwhile, the index for primary articles group, which has a weightage of 20.12% in overall WPI and includes food, non-food and minerals group too rose by 0.3% to 220.8 from 220.2 for the previous month. The index for ‘Food Articles’ group rose by 0.3% to 213.2 from 212.5 in the previous month, while, the index for ‘Non Food Articles’ group rose by 1.8% at 201.3 (Provisional) from 197.7 (Provisional) for the previous month. However, the index for ‘Minerals’ group declined by 2.4% to 347.1 (Provisional) from 355.8 (Provisional) for the previous month.

Indian economy is headed for the weakest full-year growth in a decade, at about 6%, far below the near double-digit pace before the global economic downturn. But despite the slowdown, the Reserve Bank of India (RBI) has been hesitant to lower rates since April because of above the comfort level inflation of nearly seven percent, worsened by a weak rupee that has added to the cost of fuel imports.

However, this time around, an unexpected drop in inflation figure strengthens the case for RBI to go for rate cut in its upcoming monetary policy meet, with just ‘CRR’ cut case too not being ruled out by some economist. However, this could be followed by rate cut in RBI’s monetary policy in January, as with the given apex bank’s conservative approach, Reserve Bank of India Governor Duvvuri Subbarao may wait for more evidence that inflation is on an easing trend before heeding Finance Minister Palaniappan Chidambaram’s call for cheaper credit to back a government policy overhaul. Furthermore, adding to the positive’s, core inflation rate, which the RBI holds as key to its rate decisions, also declined to 4.5% for the month of November against the figure of 5.6% in September and 5.2% in October.