June CPI Inflation At 10.02%, Rate Cut Possibilities Further Away

The government today announced the Consumer Price Index (CPI) inflation numbers for the month of June 2012. The CPI inflation data stands at 10.02 per cent over June 2011. This figure has seen a tepid reduction as compared to the data for May 2012 which stands at 10.36 per cent. The CPI has followed the same trend as the Wholesale Price Index (WPI) inflation data, which saw a reduction from 7.55 per cent in May 2012 to 7.25 per cent for June 2012.

As constituents of the CPI, the categories that have significantly risen are oils and fats, egg, fish and meat, milk and milk products, among others. Vegetables have witnessed an annual inflation rate of 27.60 per cent in June 2012.

Both WPI and CPI figures see a reduction, but whether this margin gives the RBI enough space to cut rates is highly doubtful considering the fact that the CPI still hovers above the 10 per cent mark. Moreover, inflationary pressures still remain as the delay in rainfall - the key reason to spark food inflation - and fuel price reconsiderations pose a massive prospective to add to the burden of inflation.

Considering the possibility of a diesel price hike by the government and the fact that crude oil prices have gone beyond the USD 100 mark again, with a less significant change in the rupee situation, there stands a risk of inflation shooting up again because of which it looks less likely for the RBI to opt for a rate cut.

With options limited in the hands of the monetary policy makers, the ball is in the court of the fiscal front for reforms to boost economic growth, post the presidential elections to be held on July 19, 2012. Considering the above factors, we are of the opinion that the RBI would not cut rates till the pressures see some rest and pose a lesser threat to causing a rising spree.