Reversal In Interest Rates A Distant Dream

After the Wholesale Price Index (WPI) inflation for month of February came seemingly close to the RBI’s comfort zone at 6.95 per cent, there was an air of uncertainty on the streets about whether the central bank might not initiate a reversal in the interest rate cycle during the March quarter monetary review. However, the RBI maintained a status quo on the key interest rates’ front. It also indicated that its future actions would be aimed at lowering the rates.

While this indication would have come to many as a relief of sorts, the recently released Consumer Price Index (CPI) inflation for February is a major blow to any expectations of interest rates reversing any time soon. At 8.83 per cent as compared to 7.65 per cent in January 2012, the CPI numbers for February have come within an arm’s length of the nervous 9 per cent level that had threatened economic growth all through CY2011.

While prices at the wholesalers’ level grew marginally by 40 bps between the month of January and February, the alarming 115 bps rise in prices at the consumer level has beamed some major worry signals. The CPI inflation in both rural as well as urban areas has shot up by 8.36 per cent and 9.45 per cent respectively for month of February. The same in the previous month was 7.28 per cent and 8.25 per cent respectively. The sharp rise in rural and urban inflation indicates high escalation in the cost of living.

Going forward, the CPI inflation for February not only signals towards the RBI’s reluctance towards a reversal in interest rates in the near future but also threatens to throw the country’s fiscal situation askew. Inflation near the 9 per cent levels will make it difficult for the government to achieve its flamboyant fiscal deficit target of 5.1 per cent for FY13E. Moreover, the government’s recent decision to hike excise duty all across the board may also fuel inflation as manufactures pass on the costs and goods become more expensive on the retail consumer level.