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Jan 14, 2013 at 10:07am IST

December inflation seen up slightly, rate cut expected in January

Mumbai: India's headline inflation is likely to have risen in December by less than the central bank projected, and should reinforce hopes for a cut in interest rates in January to boost an economy that is set to post its slowest growth in a decade. Data to be released later on Monday is expected to show the wholesale price index (WPI), India's main inflation gauge, probably rose an annual 7.4 per cent in December, according to a Reuters poll, reversing a declining trend and faster than the 7.24 per cent seen in November.

However, the Reserve Bank of India had projected December inflation of around 8 per cent in its October policy review, when it had also raised its March-end inflation projection by 50 basis points to 7.5 per cent. While food prices are keeping the headline inflation figure high, non-food manufacturing, or core inflation, has been falling and dropped to 4.5 per cent in November.

"If core inflation remains below 5 per cent, it increases the chance of the central bank cutting rates by 25 basis point in January," said Rahul Bajoria, economist at Barclays Capital in Singapore. The RBI's next policy review is on January 29, and analysts expect a cut of at least 25 basis points in the policy repo rate, which has been held at 8.0 per cent for past the nine months despite a sharp slowdown in the economy.

December inflation seen up slightly

Main inflation gauge probably rose an annual 7.4 per cent in December, reversing a declining trend.

Upward revisions in earlier provisional numbers could limit the extent of rate cuts by the RBI. The September WPI figure was adjusted up by 26 basis points to 8.07 per cent and economists expect a similar revision in the October number as well.

"If magnitude of revisions are high, that definitely reflects hidden demand which was not accounted for earlier and that could decelerate the pace of rate cuts," said Saugata Bhattacharya, chief economist at Axis Bank. The RBI had said in December 2012 that it expects the inflation numbers to edge up in December and January before moderating.

However, the WPI numbers may not cool as much as expected after January if the government implements a proposal to raise diesel prices every month by one rupee per litre. "If diesel prices are raised every month, that will push up inflation expectation as the second round impact of such continuous price increase will also be high," said A Prasanna, chief economist at ICICI Securities Primary Dealership.

New Delhi is trying to mend its finances as the end of the fiscal year in March nears, by raising railway passenger fares and subsidised fuel prices to reach its fiscal deficit target of 5.3 per cent of GDP. Asia's third-largest economy is likely to post its slowest growth in a decade this fiscal year after investment sentiment was hit by sluggish policymaking, a swelling fiscal deficit, high inflation and elevated interest rates. India is likely to post a growth of 5.5-5.6 per cent in 2012/13.

Industrial output contracted 0.1 per cent in November on weak capital goods production and muted consumer demand. The RBI, in recent years one of the most hawkish central banks globally, was unable to shift its policy stance towards growth until December due to stubborn inflation, even as its peers in China, Brazil and South Korea became more aggressive on policy easing to support growth.

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