July CPI Eased Slightly To 9.86%, Still High For The RBI to Consider A Rate Cut

The government today announced the Consumer Price Index (CPI) inflation numbers for the month of July 2012. The CPI inflation stood at 9.86 per cent over July 2012 vs. that of 10.2 per cent in the month of June 2012 and 10.36 in the month of May 2012. This has been a second consecutive decline however a marginal one over a period of last three months. The decline was majorly on the back of falling of energy prices.

As constituents of the CPI, Prices in the fuel and light category climbed 7.36 percent last month from a year earlier, compared with a previously reported 10.34 percent in the month of June 2012. Food and beverage prices rose by 11.53 percent, while clothing, bedding and footwear advanced 11.02 percent. Vegetables prices continue to remain high and witnessed an annual inflation rate of 27.33 per cent in July 2012.

Last week WPI was announced which eased to a 32-month low of 6.87 percent in July vs. that of 7.25% for the month of June indicating declining trend. Market reacted positively as the inflation for the second consecutive month saw decline and provides room for the RBI to cut the rate in its meeting which is scheduled in the month of September 2012

Both WPI and CPI figures saw a slight reduction, however CPI is still hovering at higher levels near to 10 percent and that is high from the Reserve Bank’s perspective. And whether this decline gives enough space to cut rates is highly doubtful.

We believe it will be very difficult for the RBI to go for a rate cut considering the current scenario which is still looking inflationary. The crude(Brent) oil prices has jumped back to USD 115 mark, Rupee is hovering around to Rs 55 level and any announcement on the deregulation of the diesel prices posses a great risk of inflation shooting up again to high levels. Two days ago Deputy Governor Subir Gokarn said in the media that inflation is currently the “dominant” threat for the growth of the economy. And as mentioned earlier also RBI may not cut the rates till it do not see any significant decline in the inflation.