The Reserve Bank of India could cut rates without worrying too much about inflation, according to Moody's Analytics.
“Indeed, with the growth side of the economy slowing, the risks have shifted sharply towards growth and they (RBI) should just grin and bear the higher inflation numbers,” said the Moody's Analytics, which is a division of Moody's Investors Service.
The RBI will conduct mid-quarter review of monetary policy 2012-13 on June 18. Economists expect it to cut the interest rate at which it lends short-term funds to banks to support growth.
Despite the uptick in the wholesale price inflation to 7.5 per cent in May, against the previous reading of 7.2 per cent, Moody's is of the view that the economy needs lower interest rates to support growth. However, the RBI cannot be too aggressive while inflation remains a problem.
The two opposing price drivers – a weaker currency and below-trend demand – are likely to continue throughout 2012 and will shape the near term inflation outlook, said Mr Glenn Levine, Senior Economist, Moody's Analytics.
Moody's assessed that on balance the rupee is now sitting 15 per cent below its peak of late-February. This will ensure that the wholesale price index based inflation remains in the 7-8 per cent range for another six months.
It said there is still plenty of downside risk surrounding the rupee at current levels and any further falls would only add further to upward pricing pressures, leaving the RBI and Indian policymakers in a tight spot.
The recent plunge in the rupee is pushing up the price of local goods, especially imported goods and commodities priced in US dollars, said Moody's Analytics. The prices of food and metals accelerated in May, and the price of fuels no doubt would have accelerated if not dictated by the Central Government.