FE Editorial : Price in a rate cut

After the poor industry and GDP data, the wholesale price inflation data comes as a pleasant surprise with headline inflation at an unexpected 6.6%—and this is when there’s no ‘base’ effect either. And manufactured non-food products inflation (RBI’s proxy for core inflation) has come down to 4.1%, almost bang on RBI’s stated comfort zone for this. The sharp slowing in the IIP—it contracted 0.6% in December, and April-December growth was just 0.7%, or less than a fifth that in the same period last year—makes it unlikely FY13 GDP will rise much beyond the 5% projected by the CSO in its advance estimates. And with GDP slowing, inflation has come off to under 7%, from around the 7.5% levels towards the end of FY12 and the average monthly 10% levels in FY11. Given the fragility of the current account deficit (CAD)—and RBI Governor’s statement that Q3 CAD would be worse than the Q2’s 5.4% of GDP—it seems unlikely that RBI would want to stimulate consumption too much either. Any worsening of the CAD, in turn, will put further pressure on inflation—around 60% of the WPI basket comprises tradeables and will, therefore, see greater inflation if the rupee depreciates further.

At the end of the day, however, the ball remains in the government’s court. High food inflation, especially of cereals like wheat and rice, is outside the purview of monetary policy, while the government has a lot more levers at its command. After

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