July Inflation Comes Lower Than Expected At 6.87%

The July 2012 Wholesale Price Index rose by 6.87%, which is lower than the market expectation between 7.25-7.40%. The inflation index reading in June 2012 was 7.25% so there is decline on sequential basis. This inflation number however does not provide head room for the interest rate cut in its monetary policy review scheduled in September as it is below the RBI’s threshold level of 5%.

The food articles inflation has grown by 10.06% while that in the manufactured article has grown by 5.58%. The inflation during in July was impacted due to the poor monsoon conditions which has driven the food prices upwardly. Besides the weaker rupee has also put the pressure on inflation as the country is a major importer of Fuel, pulses and edible oils. As country is facing drought like conditions, hence there would be further pressure on the imports.

The current inflation rate in the range of 7% is way lesser than that seen in the range of 9% in 2010 and 2011. RBI has been saying that an inflation of around 5% is comfortable for India and the current inflation is above the tolerance level. The bank went with the 50 basis points repo rate cut in April 2012 for the first time in 3 years. It has also reduced the Statutory Liquidity Ratio (SLR) by 100 bps in the latest monetary policy review which has not been cheered by the markets.

The RBI has been strictly implementing its monetary policy despite peer central banks in Europe, England, America and China showing some lenient actions.

A rate cut now is vital for the country given the fact that the high interest rates are harming the growth of the country. As per the latest IIP data, the industrial growth in the country has declined by 1.8% on YOY basis in June 2012. Capital goods was hard hit as the growth in the Capital goods was down by 27.9%. The persistent high interest rates have made the companies to go slow in their Capex plans and hence there is lower growth in Capital Goods. On the back of this RBI has lowered the GDP growth forecast to 6.5% for this year. Many brokerage and research houses have also lowered the country’s growth forecasts.