FE Editorial : For sentiments sake

Written by The Financial Express | Updated: Sep 17 2012, 08:12am hrs
The latest inflation data has been a bit of a shockerWPI rose 7.55% yoy in August, on a high base and from 6.87% yoy in July. While prices have risen pretty much across the board, the index has gone up more than expected because the recent increases in electricity tariffs have kicked in. There could be more of that in the future given that the gap between the cost of production and the sale price remains high. The big push to inflation will, of course, come from the R5/litre hike in diesel prices together with the annual cap on LPG cylinders per family, which will add an estimated 125 basis points, the full impact of which we should see in the October data. The other driver will be QE3, which will keep prices of commodities high and the price of crude oil elevated at over $100 per barrel. Since exports remain sluggish, the rupee may not recover soon and that means imports remain costly. In sum, inflation could nudge closer to 9% by the end of the year. Also, from RBIs point of view, inflation in manufactured products rose 0.8% in August, suggesting corporates still have a fair bit of lost pricing power. Consumption demand, on the other hand, has slowed sharply as the IIP data showed.

Nonetheless, given there will be some losses to revenue because of the cut in excise duties on petrol, unless the government cuts back on expenditure seriously, or ups the prices of auto fuels, theres virtually no chance of the deficit being reined in at 5.1% of GDPit will be closer to 6%. So, RBI really has no case for cutting rates; its true the government has shown some spunk in the last few days but the tough decisions are yet to be takenon the Land Acquisition Bill, for instance. However, a small cut of even 25 basis pointsfollowed up by a base rate cut by bankswould ease the pressure on corporate cash flows. And perhaps change the mood.