A sharp slide in vegetable prices on the back of better farm supplies helped moderate headline inflation to a five-month low in December, at 6.16 per cent.
The dip in inflation has cemented expectations that the RBI will not hike policy rates on January 28. Besides, the Government expects foodgrain production to touch an all-time high this year on timely and widespread monsoons. This may further aid the softening trend in food inflation.
Vegetable prices declined nearly 30 per cent month-on-month in December 2013, official data showed.
Prices of food articles fell 6.4 per cent month-on-month, while primary articles were down 5 per cent.
Wholesale Price Index inflation in December 2013 is significantly lower than the headline inflation of 7.52 per cent in November last year.
In conjunction with the recent dip in retail inflation to 9.87 per cent, it validates RBI Governor Raghuram Rajan’s belief that prices will fall. Last month Rajan had left interest rates untouched.
RBI pause The consensus view among economists and bankers is that the news of a significant fall (136 basis points) in inflation will prompt the RBI to pause on January 28.
But, the other view is that the RBI will be guided largely by the core inflation movement and hence a hike in policy rates this year cannot be ruled out.
A cut in policy rates is, however, not on the cards even as industry on Wednesday urged the RBI to lower interest rates, say economists.
Meanwhile, the headline inflation for October 2013 has now been revised upwards to 7.24 per cent from 7 per cent, official data released on Wednesday showed.
The fall in headline inflation cheered the stock markets, with the benchmark Sensex closing at a two-week high.
While the Sensex rose 256 points, the 50-share Nifty rallied 79 points to close at 6320.90, the highest level since December 10 last year.
The yield on 10-year Government bonds fell nearly 10 basis points.
On the farm front, things are looking better for the Government. Growth is expected to be higher, at around four per cent, thanks to a good monsoon.
“We will be approaching an all-time record production of foodgrain this year,” said Agriculture Minister Sharad Pawar, addressing the 85th Annual General Meeting of the Indian Council of Agricultural Research, on Wednesday.
The second advance estimates on foodgrain output are expected in February.
India’s foodgrain production had touched an all-time high of 259.29 million tonnes in 2011-12. But it fell marginally in the subsequent year to around 255.36 million tonnes on account of poor rains in some parts of the country.
V. Kannan, Chairman and Managing Director, Vijaya Bank, said he expects policy rates to be maintained on January 28.
On whether the RBI is expected to cut or hike policy rates in March, Kannan said it was too early to say anything.
Upasna Bhardwaj, Chief Economist, ING Vysya Bank, said the good news on headline inflation will be a breather for the central bank but may only be a temporary comfort given the focus on core inflation.
Core inflation, which has inched up to 2.8 per cent, will be closely monitored and the RBI will be mostly guided by this indicator in the coming months, she said.
“I expect the RBI to pause on January 28. I am not ruling out a hike in the coming months. But I certainly don’t see any policy rate cut,” Bhardwaj told Business Line .