Inflation at 5%; in RBI's comfort zone after 3 yrs

Markets run high on hopes of a rate cut

Inflation at 5%; in RBI's comfort zone after 3 yrs

India’s headline inflation fell below 5 per cent in April, dropping within the RBI's comfort zone for the first time in more than three years and fuelling market hopes for more monetary easing to revive flagging economic growth.

The wholesale price index rose 4.89 per cent from a year earlier and was the lowest inflation rate since November 2009 and well below the 5.50 per cent forecast by analysts in a Reuters poll. It was more than a full percentage point lower than the 5.96 per cent rise in March.

Inflation has been a persistent headache for policy-makers struggling to breathe life into Asia's third largest economy, and has been a major factor in the declining popularity of the government of Prime Minister Manmohan Singh.

The low number quickly sparked gains in the bond and share markets, while the rupee was little changed. “It is a frenzy. The market is pricing in a rate cut," said Ashish Vaidya, head of treasury at UBS in Mumbai. Earlier this month, the RBI cut interest rates by a quarter point for the third time since January, to reduce the policy repo rate to 7.25 per cent.

The bond market rallied to a three-year high, with the benchmark 10-year bond yield dropping 4 basis points, while stocks were up and the rupee strengthened slightly to 54.61/62 per dollar versus Monday's close of 54.73/74.

Global commodity cooling

Inflation was mainly cooled by a moderation in food and fuel costs helped along by lower global commodities prices. Food inflation slumped to 6.1 per cent from 8.7 per cent a month ago on lower wheat, meat and egg prices. Fuel rose 8.8 per cent on the year after a rise of 10.2 per cent in March.

Non-food manufacturing inflation, which the central bank monitors to gauge demand-driven price pressures, slowed to 2.8 per cent in April from 3.5 per cent a month ago, after the international price of iron ore and steel dropped.

“With food prices expected to remain stable, manufacturing prices weak due to slow growth, and commodity prices stable, inflation in expected to be on a broad downtrend for the next six months and this, we believe, opens up room for more rate cuts,” said Rahul Bajoria, Regional Economist at Barclays Capital in Singapore.

Government data showed on Monday that annual retail inflation slowed by a full per centage point to a 14-month low of 9.39 per cent in April.Gold takes off sheen

Not everyone was so upbeat. Indranil Pan, chief economist at Kotak Mahindra Bank, expects caution from the RBI until inflationary risks abate and the current account deficit improves.

“Since RBI expects inflation to rise post-September, I don’t think the governor will risk cutting rates aggressively,” Indranil Pan said.

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