Inflation, or the price rise measured by the wholesale price index (WPI) moderated to 7.48 per cent in November from 8.58 per cent in October, raising hopes that the Reserve Bank of India (RBI) may 'pause' in hiking its key policy rates in its mid-quarter policy review on Thursday.
This is the first time that the WPI inflation dipped below the eight per cent level in 2010 and the fourth consecutive month in which the overall inflation remained in the single digit. It remained above the 10 per cent level for six months till July. It was at 4.50 per cent in November, 2009.
The equity market also took respite from the lower inflation numbers. The Sensex, which was trading close to the previous day's closing figure till inflation figures came in, posted a gain of 107.41 points to close at 19,799 points. Banking stocks, which were being hammered for over a week now as they were reeling under tight liquidity conditions and possible rate hike fears, got some reprieve from the inflation figures.
However, the fuel price hike in the wake of the spiral in global oil prices crossing $90 per barrel could derail this sentiment. BPCL hiked petrol prices by Rs 2.95 per litre from midnight Tuesday. The moderation of WPI inflation was mainly supported by food inflation, which declined to single digits at 6.1 per cent year-on-year in November from 10 per cent in October. But non-food manufactured inflation - a measure of core inflation - rose marginally to 5.3 per cent from 5.1 per cent.
"The steep fall in inflation surprised the markets. Nobody expected such a sharp fall, which indicates a more-than-expected softening in the price rise. RBI may have to wait for concrete figures on the growth front before taking any monetary action," said Professor N.R. Bhanumurthy of the National Institute of Public Finance and Policy. The economy grew by 8.9 per cent during the July-September quarter, taking the annualised growth to 8.5 per cent. Industrial growth is also picking up pace posting 10.8 per cent growth in October, compared to 4.4 per cent in September.
Sonal Varma, India economist of Nomura Financial Advisory and Securities (India) feels that the fall in inflation was tempered by the base effect, rather than the real economy.
Commenting on the inflation figures, finance minister Pranab Mukherjee said that inflation was expected to decline to six per cent by March, 2011. "I am hoping it to be around six per cent by March," Mukherjee said. However, Sonal Varma feels that an inflation spiral would reemerge in the January-March quarter of 2011, after touching a low of 6.5 per cent, citing rising global commodity prices and domestic fuel price hike. RBI's comfort level for inflation stands at five to 5.5 per cent.
On the policy interest rate front, Varma said, "We expect the RBI to deliver a 0.25 per cent rate hike in January, followed by a pause until August, before resuming with a 0.75 per cent worth of hikes between September 2011 and March 2012."
RBI had hiked the policy rates - repo (at which RBI lends to banks) and reverse repo (at which it pays banks on their overnight deposits) rates - by 1.5 cent and two per cent respectively, since March 2010.
Avinash Gupta, V-P (research), equity of Bonanza Portfolio said that the market would consolidate at around the current levels on Wednesday, while looking forward to the monetary policy review on Thursday.
Courtesy: Mail Today
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