India's headline inflation eased marginally in March helped by a softening in prices of manufactured goods, reinforcing expectations the central bank will cut interest rate for the first time in three years on Tuesday to revive economic growth.
The wholesale price index (WPI), India's main inflation indicator, rose an annual 6.89% in March, higher than 6.70% rise estimated by analysts. Wholesale prices rose 6.95% in February.
The annual reading for January was revised up to 6.89% from 6.55%, the government said in a release on Monday.
The central bank's nearly two-year long battle against high inflation, coupled with a political logjam in New Delhi and an uncertain global economy, has slowed down India's economic growth. The growth probably faltered to a three-year low of 6.9% in the 2011/12 fiscal year that ended on March 31.
"For the RBI (Reserve Bank of India) what should really matter is the manufacturing number as policy rates act on the demand side, so we think the RBI will cut rates," said A. Prasanna, an economist at ICICI Securities Primary Dealership.
The RBI is widely expected to cut its main lending rate – the repo rate – by 25 basis points to 8.25% when it reviews policy on Tuesday.
The central bank has already cut the banks' cash reserve ratio, the amount banks must maintain with the central bank in cash, by 125 basis points in two moves since late January to 4.75%, making more money available for lending.
Manufacturing goods inflation – a barometer for demand-driven price pressures – dropped to 4.87% from 5.75% in February.
However, a spike in food prices and suppressed fuel inflation are likely to temper the quantum of rate cuts for the year. Food prices rose 9.94% on year in March compared with a 6.07% rise in the previous month, while fuel inflation eased to 10.41% from 12.83% in February.
"In the coming months, primary and fuel inflation will continue to inch higher, because of seasonality and in fuel because of incomplete adjustment in prices," said Shubhada Rao, chief economist at YES Bank.
RISKS AHEAD
Domestic political compulsions have helped in keeping fuel inflation largely steady. Global oil prices have been on the boil on rising geo-political tensions despite the prospect of cooling demand in a slowing global economy.
India's heavy dependence on imported crude makes it vulnerable to the vagaries of the oil market. Even as a soaring fuel subsidy bill is bleeding its finances, political compulsions have desisted the government from raising pump prices.
New Delhi risks a further erosion of fiscal credibility if it continues to delay a decision on raising fuel prices. But any increase in prices could accelerate inflation, which in turn could have a bearing on the central bank's monetary policy.
Monsoon rains, critical for India's farm sector, have the potential of upsetting all inflation projections. Normal rains this summer should help rein in food prices.
Failure of monsoon rains in 2009 resulted in India's one-and-a-half year of struggle with high food inflation.
