Inflation fell sharply by 57 basis points to 5.07% for the week ended January 24 as prices of food items and some manufactured products fell. Inflation is expected to fall even more sharply in the coming week that will capture the impact of fuel price cut announced last week. Analysts expect inflation to fall below 2% by March-end, which would give the Reserve Bank of India sufficient headroom to cut interest rates. The central bank projects inflation of 3% of lower by the fiscal end.
The RBI has kept its policy rates unchanged at the third quarter review of the monetary policy last week, while promising swift action when needed. Prime Minister?s Economic Advisory Council chairman Suresh D Tendulkar on Wednesday said the RBI may tweak rates after the interim budget is presented on February 16. A further cut in rates is desirable, he said.
Inflation was the lowest since February 9 when it stood at 4.98%. Inflation for the week ended November 29 was revised downwards to 7.86% from 8% provisional estimates, indicating that prices have been falling faster than reflected in the initial data.
Financial markets mostly ignored the fall in inflation. The rupee was steady at 48.80/81 per dollar after the latest inflation data, little changed from Wednesday?s close of 48.82/93. Bond trading was interrupted by a breakdown in the trading platform of Clearing Corporation of India Ltd.
In a meeting with the finance minister Pranab Mukherjee on Monday, public sector bank chiefs said there was a possibility of up to 100 basis points cut in the lending rates. Falling inflation would pressurise banks? to lower deposit rates, although falling deposits and competition from small savings schemes may prevent them from falling below 8%, bankers said. Although RBI did not change any rates at the January review, it is expected to play a relatively larger role in the coming months when model code of conduct due to elections would prevent government from announcing any policy changes. Plus, there is also a feeling in the government that it might not have any more fiscal headroom in the next year, unless it is able to bring down subsidies. Revenue projections are already being re-looked into in light of collections falling below estimates.
Inflation rate fell across commodity groups. Primary articles inflation fell to 9% from 11% in the previous week. Food articles inflation declined marginally to 11.1% from 11.2%. Non-food articles inflation fell to 5.7% from 6.4%. Inflation in ?minerals? fell abruptly to (-) 0.6% from 39% last week due to a steeply negative rate in iron ore, the finance ministry said in a statement. In fuel and power group, the inflation was (-) 0.8%, versus (-) 1.4% last week. Pace of price rise of manufactured products fell to 5.7% from 6.25. ?However, textiles as a sub-group still register double digit inflation from cotton textiles, cotton yarn and jute, hemp and mesta textiles,? the statement said.
In the primary articles group, prices of fruit, vegetables and bajra declined by 2% each, while coffee became cheaper by 1%. Raw rubber, groundnut seed and gingelly seed became cheaper by 6%, 3% and 1%, respectively. The prices of steel ingots, aluminium products and bars and rods too fell during the week. A sharp dip was also visible in metal prices, with basic metals and alloys down 6.1%, iron and steel by 8.3% and non-ferrous metals by 4.8%. Aluminum prices also fell by 7.9%. Coffee powder and khandsari became cheaper by 1%, while prices of woolen cloth went down by 2%.