Slower-than-expected WPI inflation growth in Dec fuels hopes for early rate cut

Slumping global oil markets helped the country post slower-than-expected wholesale price (or WPI-based) inflation in December, raising hopes for an early cut in interest rates by the Reserve Bank of India to help the economy out of its longest phase of sub-par growth since the 1980s.

The wholesale price index (WPI) rose 0.11 per cent year-on-year compared with a Reuters poll forecast by economists of a 0.6 per cent jump. Wholesale prices were unchanged in November.

Official data released on Monday showed consumer price inflation quickened at a slower-than-expected pace of 5 per cent in December, remaining well within the RBI's medium-term target of 6 per cent.

With a near 60 per cent nose-dive in global oil prices since June 2014 and food prices remaining in check despite poor monsoon rains last summer, some analysts expect the central bank to reduce its repo rate at its next monetary policy review on February 3. The repo rate has stood at 8.0 per cent for the past year.

"Falls in commodity prices have brought down WPI, CPI (consumer price index) alike," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.

Wholesale fuel prices fell an annual 7.82 per cent in December, their biggest fall since September 2009. Month-on-month, the prices were down 2.4 per cent.

Similarly, food prices recorded a 1.9 per cent fall for the reporting month from November. However, the prices were up 5.2 per cent year-on-year as against a 0.63 per cent rise in November.

"All indicators now point that the RBI should cut rates by at least 25 basis points in its next policy meeting on Feb 3," said Srivastava.

However, some analysts say RBI Governor Raghuram Rajan may delay the cut in interest rates amid mounting concerns over the government's fiscal health.

Sluggish revenue receipts have driven up the fiscal deficit to 99 per cent of the full-year target in just the first eight months of the ongoing financial year ending March 31, 2015, casting doubts on Finance Minister Arun Jaitley's ability to trim the deficit to a seven-year low of 4.1 per cent of gross domestic product (GDP).

Concerned over slow economic growth, some government aides are also pushing to row back on fiscal deficit targets when Jaitley announces the budget for 2015-16 in February. They have advocated more spending on infrastructure projects that could lift growth.

Rajan, however, has set fiscal consolidation as a pre-condition for lowering key policy rates.

"Given the uncertainties, the RBI might prefer to monitor the content of the end-February's budget and credibility of fiscal targets before easing rates," said Radhika Rao, an economist at DBS Bank in Singapore.

"This suggests rate cuts might begin April 2015 onwards, with a small probability of inter-meeting cut in March," Rao added.

(Reuters)