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After Narendra Modi govt's quick action on inflation, Deutsche Bank sees 'bold steps' in Union Budget

Jun 18 2014, 19:01 IST
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The Wholesale Price Index (WPI)-based inflation rose to a five month high of 6.01 per cent in May. (Photo: AP) The Wholesale Price Index (WPI)-based inflation rose to a five month high of 6.01 per cent in May. (Photo: AP)
SummaryNarendra Modi govt's action to combat inflation makes Deutsche expect reforms-driven Budget.

Enthused by the swift PM Narendra Modi-led government action to tackle inflation, a Deutsche Bank report has said that bold steps can be expected in the Union Budget next month.

The government, yesterday announced a host of measures to tame inflation, which had soared to a five-month high of 6.01 per cent in May. These decisions were taken at a high-level meeting of Ministers and Secretaries called by Finance Minister Arun Jaitley.

"Some of these measures have been long suggested remedies for curbing food inflation but the erstwhile government was unable to move swiftly on these owing to coalition dynamics," Deutsche Bank said in a research note.

"The swiftness in recommending the exemption of perishables from the APMC is a bold decision, and will lead the market to now expect similar bold steps in the budget," the research note added.

Among other measures, the Centre asked the states to delist fruits and vegetables from the Agricultural Produce Market Committee list, allowing farmers to sell their produce directly in the open market, and imposed a minimum export price of USD 300 per tonne on onions to curb their exports.

The government has also decided to release an additional 50 lakh tonnes of rice to states for sale in the open market at APL (above poverty line) rate of Rs 8.30 per kg and allowed states to directly import pulses and edible oils to meet

shortages.

"These measures are strong indicators of the government's resolve to address food inflation and should assuage the RBI that the government is now walking in lockstep with it to address high inflation, the report said.

The Wholesale Price Index (WPI)-based inflation rose to a five month high of 6.01 per cent in May.

Experts apprehend that the likelihood of poor monsoon coupled with rising oil prices on the back of political tension in Iraq, may further aggravate the domestic scenario.

Rising inflation will make it difficult for RBI to cut interest rates to boost growth. It had hold rates steady for last two policies to check inflation.

"The next big milestone for equity and bond markets will now be the union budget where markets and the RBI will look out for additional comfort on fiscal consolidation and the government's borrowing target for the year," the report added.

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