Wholesale price inflation for March at 9.9% may not have crossed the 10% mark as feared, but the number is nonetheless an embarrassment for the government. Also, as HSBC?s economist Robert Prior Wandesforde points out, the statistics office is progressively revising up the historical numbers (this time, January?s number was increased from 8.6 to 9.4%) and a similar revision can be expected to the February and March numbers as well. Nevertheless, Wandesforde estimates that the three month-on three month seasonally adjusted annualised increase in the headline WPI slowed to 8.4%, down from a high of 12.5% in September, supporting the notion that inflation has peaked.
So, even though inflation may be way above the Reserve Bank of India?s target of 8.5%, since the economy?s not really overheating just yet, it?s possible governor Duvvuri Subbarao may restrict the rise to just 25 basis points at the upcoming RBI Annual Policy on April 20 and mop up some liquidity through a CRR hike of 25 basis points. Both bankers and borrowers have been bracing for a 50 basis points hike in the repo and reverse rates, with some also readying for an additional hike in cash reserve ratio (CRR) of 25 basis points from 5.75% to 6%.
However, the central bank may not turn so hawkish yet. In January, the governor has observed that the recovery was ?unbalanced? and yet to become ?sufficiently broad-based?. Since then, the stronger rupee has begun to hurt exporters. And the growth in India?s factory output for the month of February 2010, of 15.1% year-on-year, has come in a tad below expectations, with January having seen a rise of 16%.
Again, while India Inc?s order book almost doubled in the March 2010 quarter and order inflows at around Rs 92,000 crore, were estimated to be at their highest in a long time, bankers maintain that they don?t see too much happening on the ground yet. Moreover, except for Asia, economic revival around the globe remains unconvincing, with a few European banks vulnerable to shocks arising out of the sovereign debt crisis in Greece.
RBI has been accused of ?falling behind the curve? and, to be sure, the central bank would want to seen sending out a strong signal that it is determined to tame inflation. The governor has already indicated that the RBI was compelled to up rates in March because inflation was outside the comfort zone; more importantly, he stressed the point that inflationary pressures were getting out of hand not just in primary articles but also in manufacturing.
In this context, the sharp rise in the prices of assets such as real estate cannot be comforting. With Parliament in session, therefore, no one would be surprised if the governor did tighten rates by 50 basis points. What he has going for him is the ample liquidity in the system. While banks have been lending more — credit growth for 2009-10 nudged the 17% mark– the sharp spurt in loans for the last fortnight of the year was somewhat surprising. Bankers believe loans could grow at 20-22 % this year, which is not exciting given the subdued base.