Inflation in the economy continues to be a big threat and a move to cut interest rates further could worsen the inflation outlook going forward.
The falling Industrial Output (IIP) for March 2012 at negative 3.5 per cent despite indicating towards a slowdown in economic growth activity gave some hope to investors on the streets that the Reserve Bank of India (RBI) in its next monetary policy meet may further relax its stance on the interest rate front to urgently revive the economy. However, the true application of this economic theory may not be true, given the pressures that the Indian economy is currently suffering.
With the government expected to announce the WPI inflation numbers by noon today, the street estimates for inflation in the month of April 2012 to come at 6.7 per cent, slightly lower than the 6.89 per cent seen in March 2012. Despite the expectation of this marginal cool-off in inflationary pressures, let’s not forget that the final effect of rise in prices of fuels like petrol and diesel have yet to take place. With the budget session coming to an end there are widespread talks on the street that the domestic oil refiners may undertake a fresh round of hike’s in retail fuel prices, which would not only push up the fuel articles inflation but also could push up manufacturing inflation which was last seen at 4.87 per cent in the month of March 2012.
The country is also being hammered by a weak rupee and ballooning current account deficit (CAD). For the first time in history it has been noticed that crude prices have remained rigid above the USD 100 per barrel level for a stretch of more than 200 days at a go. Though the global crude oil prices have cooled off in the recent past, in terms of the Indian basket the cost of crude continues to remain high thanks to the unprecedented weakening of the INR against the US dollar. With crude oil constituting a major part of our import bill this crude situation is very alarming for our economic situation.
Last but not the least, the true ground reality of inflation in the economy felt by its citizens is depicted by the consumer price index (CPI), which stood alarmingly high at 9.47 per cent for the month of March 2012. This clearly indicates persistent inflationary pressures in the economy at the retail level. Hence, we at DSIJ are of the view that inflation in the economy continues to be a big threat and a move to cut interest rates further could worsen the inflation outlook going forward.