Inflation at 2-year low, but EMIs may not fall
Stubbornly high and sticky inflation has been a double whammy for millions of Indian households, which are struggling with high food prices and costlier EMIs for the last many years. It has also hit the electoral prospects of the UPA government as evident from the verdict of the recently concluded assembly elections.
The sharp decline in January's consumer price inflation, however, will be seen as a shot in the arm for the government, which faces elections by May. Retail inflation eased more than expected to a 24-month low of 8.79 per cent in January tracking a 13 per cent fall in vegetable prices. (Read: Inflation hits 2-year low)
However, those hoping for an interest rate cut at the April policy meet of the Reserve Bank of India are likely to be disappointed. Nomura economists Sonal Varma and Aman Mohunta say vegetable prices have fallen, but there are no visible signs of a sustained moderation in other consumer price inflation components because high rural wage growth and elevated fuel prices have kept costs high.
Besides, core inflation rose to 8.1 per cent in January and at current levels are deemed uncomfortably high from the Reserve Bank's perspective. Core inflation excludes items such as food and fuel prices that face volatile price movements and represents the long run trend in the price level.
Rupa Rege Nitsure, chief economist of Bank of Baroda says the central bank is unlikely to change its stance and the tightening bias will continue.
"RBI will remain hawkish with inflation on the watch before further moves," she added,
RBI Governor Raghuram Rajan is likely to be unmoved despite a third straight fall in industrial output in December because inflation remains the number one priority of the central bank. High inflation prompted Dr Rajan to raise interest rates in January, the third hike since September, even though economic growth has been stuck around a decade-low of 4.5 per cent for four quarters.
Last month, a central bank panel proposed revamping its policymaking structure by setting a long-term retail inflation target of 4 per cent, plus or minus 2 per cent. In the intermediate term, it proposed the goal would be to bring it down to 8 per cent by January 2015 and 6 per cent by January 2016.
Some economists have also warned about election-related spending, which can contribute to higher inflation in the coming months.
Banks can cut interest rates only when their cost of funds goes down, which partially depends on low-cost CASA (current account savings account) deposits. Currently, rates for fixed deposits above 1 year are as high as 9 per cent and unless these high-cost deposit rates are cut, there's little likelihood of a revision base rates, which form the basis for all retail loans.
(With inputs from Reuters)
