A day ahead of the RBI’s mid-quarter review of monetary policy, the finance ministry's Mid-Year Economic Analysis released on Monday has built a case for rate cut by the central bank on the basis of a decline in momentum of non-food manufacturing (NFM) inflation and a moderation in food inflation.
Citing persisting inflation, the RBI has refrained from cutting key policy rates despite industry citing a fall in industrial production and persuasion by the Centre.
The finance ministry had, just before the last policy review of the RBI, released a five-year fiscal consolidation plan, apparently to impress upon the RBI that it is serious about bringing down the fiscal deficit to 5.3% of the GDP this fiscal and further down to 3% by 2016-17.
This year’s 2012-13 Mid-Year review said, “The seasonally adjusted annualised rate of inflation (SAAR) indicates the momentum of NFM inflation is currently on a decline.” The review noted that in addition to the headline WPI (whole-sale price-based inflation) and CPI (consumer price index) inflation, RBI has been monitoring NFM inflation as the key measure of core inflation that will influence its policy stance.
The reason for this emphasis is partly because demand conditions, which can be affected by the RBI interest rate policy, are better measured by NFM inflation, which is also relatively sticky, it explained.
The WPI inflation in November had moderated to a 10-month low of 7.24% from 7.45% a month ago, while the retail inflation (CPI) rose to 9.9% in November from 9.75% in October. The industrial production data for October, denoting a 16-month high of 8.2% annual growth on the back of robust performance manufacturing and capital goods — contrasting with negative growth reported in five out of the first seven months of the fiscal — had brought some cheer recently.
The surge in October industrial output data and a slide in WPI inflation in November have given rise to expectations of RBI going by its previous indications of a cut in key policy rates in the January-March quarter. On food inflation, the review said, WPI food inflation has shown a sharper moderation during the period April 2010 to October 2012, because of its initial high levels.
“Food inflation, however, is more structural and its response to monetary policy changes is relatively weak. However, the momentum of food inflation is also pointing towards moderation,” it added.
Elaborating on NFM inflation, the review said within core inflation, while the