India\u2019s wholesale price inflation dropped to 5.96% in March from 6.84% in February, at least 30 basis points (bps) below market estimates, fuelling widespread expectations of a rate cut in the first week of May when the Reserve Bank of India (RBI) announces its annual monetary policy for fiscal 2014.
\nOne basis point is one-hundredth of a percentage point.
\nAt 5.96%, wholesale inflation is now at its 40-month low.
\nAnother piece of good news: Non-food, non-oil manufacturing inflation or the so-called core inflation is also continuing its southward movement. In March, it dropped to 3.48%, some 22 bps lower than most market estimates, and its lowest since February 2010.
\nIn immediate reaction, the yield on the benchmark 10-year government bond dropped from 7.86% to 7.82% and most rate-sensitive stocks, particularly banks, rose.
\nYields and prices of bonds move in opposite directions.
\nIt\u2019s now fairly certain that the Reserve Bank of India (RBI) will go for a policy rate cut in May to prop up slowing economy, even though RBI governor had said in his last policy that the scope for monetary easing is limited.
\nThe question is: will D. Subbarao stick to his \u2018baby step\u2019 of a 25 bps rate cut or show boldness by combining it with a cut in banks\u2019 cash reserve ratio (CRR)\u2014the portion of deposits that commercial banks need to keep with RBI\u2014by an identical margin?
\nHe can even go for a 50 bps policy rate cut to surprise the market.
\nCRR is now 4% and the repo rate, or the rate at which RBI lends to banks, is 7.5%.
\nThe quantum of a May rate cut is not certain as yet. This is for two reasons\u2014one, the January wholesale price inflation rate has been revised upward from 6.62% to 7.31%; and two, the retail inflation continues to remain high, in double digits.
\nIn March, consumer price inflation or retail inflation dropped to 10.4% from 10.9% in February and against the Street expectations of 10.7%, but it\u2019s still high. The reduction in fuel subsidies may continue to contribute to retail inflation.
\nThe record high current account deficit is yet another factor that will weigh against a substantial rate cut, but it is fairly certain that a reduction is on the cards.
\nDoes this mean that the cost of money will be cheaper for corporations and individual borrowers for auto loans and mortgages. That\u2019s a question only banks can answer. Unless they are able to pare deposit rates, they will not be in a position to cut interest on loans despite RBI revising its policy rate.
\nBut with gold prices coming down, money flow may increase into the banking system and the current account deficit scene is likely to improve. This will give banks a handle to cut their loan rates.<\/p>\n","protected":false},"excerpt":{"rendered":"
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