This, coming on the back of last months drop to a two-year low of 8.79% in retail inflation which is being accepted as the measure of nominal anchor by the Reserve Bank of India mulling inflation targeting has rekindled industry hopes of interest rate cuts in not-so-distant future.
While analysts said the RBI was unlikely to raise rates at its April review, the government said there could be a real push to growth right now, an oblique reference to the monetary policy.
The Consumer Price Index (CPI) inflation stood at a 23-month high of 11.24% in November before falling sharply to 9.9% for December, and further to 8.79% in January.
However, an irritant is the inching up of the core WPI inflation (price rise in non-food manufactured items) for the fourth consecutive month through January to 3%, though it also remained range-bound. Some analysts also saw a possible spurt in vegetable prices in the summer months as a risk factor. These, most analysts felt, coupled with the lingering uncertainties about the impact of the US Federal Reserve tapering and the recent emerging markets sell-off on an already weak rupee will likely prompt the RBI to hold on to rates at its next monetary policy review meeting on April 1. The RBI is also expected to wait for the forecast of the monsoon for 2014, expected in late April-May, before trimming policy rates.
With the benefit of the latest inflation data, economic affairs secretary Arvind Mayaram said he hopes there would now be a real push to boost growth. GDP growth in the first half of this fiscal stood at 4.6% and the advance estimate for growth for the whole year is 4.9%. Industrial output has fallen 0.1% in the first nine months of this fiscal.
Analysts forecast WPI inflation, especially in food items, to remain subdued for the rest of this fiscal as well in view of an expected bumper rabi harvest. Moreover, since food items account for almost 50% of the CPI, retail inflation is expected to stay relatively low as well and hit the central banks targeted level of 8% even before its desired timeline of January 2015, they added.
While core WPI last month was the highest since April 2013, retail core inflation last month, too, rose, albeit marginally, to 8.1% from a two-year low of 8% in December. Importantly, although the November headline inflation figure has been kept unchanged at 7.52%, food prices were revised down within the index, leading to a marginal upward revision of sticky core inflation.
The RBIs renewed focus on targeted inflation control (the Urjit Patel panel has suggested a target of 8% CPI inflation by January 2015, 6% by January 2016 and a long-term goal of 4%, plus or minus 2%) may also prompt the central bank to stay hawkish for some more time.
Food inflation, the key driver of headline inflation in recent months, slowed to 8.80% in January from 13.68% in the previous month as vegetable prices dropped 21% month-on-month.
Vegetable prices, which spiked nearly 80% between July and November from a year earlier the highest since 1998 before easing since December, have had spillover effects in manufactured food inflation and has triggered a broad cooling in the headline rate, according to a Barclays report.
Fuel and power inflation dropped marginally to 10.03% last month from 10.98%. Manufactured item inflation inched up marginally in January to 2.76% from 2.64% a month before. Analysts said any move to revise upward wages under the MGNREGA, as is being speculated, before elections will drive up manufacturing inflation. Moreover, purchasing managers indexes earlier this month pointed to underlying inflationary pressures as output prices grew at the fastest pace in three months.
With the tapering programme of the US Federal Reserve having started and likely to continue, there will be the tendency for rates to be held at the current levels to attract foreign funds in the debt segment, said CARE Ratings chief economist Madan Sabnavis.
However, seeking an immediate rate cut to spur growth, CII director general Chandrajit Banerjee said the government should also take steps to address supply side bottlenecks to prevent a relapse of high food inflation. Ficci president Sidharth Birla said companies discretionary spending has taken a hit due to lower disposable incomes, in part also owing to high interest rates.
According to the advance estimates of national income for 2013-14, private consumption indicates just 4% growth this fiscal, the lowest in about 11 years.