Inflation fell sharply to 5.24% for the week ended January 3 from 5.91% in the previous week, giving the RBI room to pare interest rates further. The finance ministry expects inflation to fall between 3-4% by March end, even as analysts are projecting an even lower rate of 2% by that time.
?We are seeing robust and healthy decline in inflation. The expectation is that inflation will come down to a still more manageable number, that is, between 3% and 4%, by the end of March,? Ashok Chawla, secretary, department of economic affairs, ministry of finance, said. A likely cut in the fuel prices in the coming weeks, slower growth in demand and falling commodity prices would mean the reduction in the inflation rate can be even sharper going forward. ?If the government cuts petrol and diesel prices, inflation might dip to 1-1.25% by the end of March,? Axis Bank economist Saugata Bhattacharya said.
The latest inflation figure was the lowest reading since February 9, when it stood at 4.98%. For the second successive week, provisional inflation data was revised downwards. Inflation in the week to November 8 was lowered to 8.71% from the provisional 8.95%. This inflation has been falling faster than captured in the provisional numbers.
Financial markets more or less ignored the inflation numbers. The 30-share BSE index closed down 3.45% at 9,046.74 points, and the 50-share NSE closed down 3.48% at 2,736.70 points, following losses in global markets amidst a deepening banking crisis. The yield on 10-year government bonds closed at 5.55%, little changed from Wednesday?s close of 5.58%. The rupee ended at 49.03/04 per dollar, from the previous close of 48.85/86, as stock market losses raised concerns of risk aversion among investors.
However, many analysts do not expect RBI to turn aggressive in its policy cuts as liquidity conditions have been benign in recent weeks. ?There is enough liquidity in the system, so I expect no rate cut from the RBI in the coming days,? Bhattacharya said. The RBI is scheduled to review the monetary policy on January 27. The central bank is also expected to revise its GDP growth and inflation targets at the review. RBI current inflation target for this fiscal year is 7%, while finance ministry?s chief economic advisor Arvind Virmani expects it to fall to 5%.
Prices of primary articles rose at a slower pace of 10.9% during the January 3 week, compared to 11.6% in the previous week. Fuel and power group prices fell as inflation declined further to (-) 1.3%, compared to (-) 0.7 in the previous week. Manufactured products inflation also fell to 5.6% from 6.2%.Prices of fruit and vegetables fell by 3%, those of gram, barley and condiments and spices fell by 1% each. However, the price of masur went up by 2% and those of jowar, tea, urad, moong and rice rose by 1% each.
The index for the non-food articles group declined 0.4% as the price of groundnut seed fell 2% and there was a 1% fall in prices of linseed, raw cotton, castor seed and copra. However, prices of raw rubber and sunflower went up by 5% and 2%, respectively. The index of fuel declined 0.2% due to lower prices of bitumen (9%), aviation turbine fuel (8%) and light diesel oil (3%), naphtha turned expensive 3%.