Expert views: March inflation slows to 5.96 pct, below forecast

MUMBAI Mon Apr 15, 2013 2:27pm IST

A vendor works at his vegetable stall at a wholesale fruit and vegetable market in Mumbai April 14, 2013. REUTERS/Vivek Prakash

A vendor works at his vegetable stall at a wholesale fruit and vegetable market in Mumbai April 14, 2013.

Credit: Reuters/Vivek Prakash

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MUMBAI (Reuters) - India's wholesale price index (WPI) rose a slower-than-expected 5.96 percent in March, the lowest rate in more than three years, government data showed on Monday.

Analysts polled by Reuters had expected wholesale prices, the main inflation measure, to rise an annual 6.4 percent, slower than an annual rise of 6.84 percent in February.

The reading for January was revised up sharply to 7.31 percent from 6.62 percent.

Core inflation eased to around 3.5 percent from 3.8 percent in February, analysts said.

(Click here to read the main story on March inflation)

COMMENTARY

A PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI

"Given that inflation has undershot RBI's expectation, the scope for rate cuts is more now. I'm inclined to expect that the RBI will cut rates by 25 basis points in May and beyond compared with our earlier expectation of pausing for six months after the May policy."

GAURAV KAPUR, SENIOR ECONOMIST, ROYAL BANK OF SCOTLAND, MUMBAI

"Given that the momentum of inflation is easing for the last six months, manufactured products slowing and core inflation falling to 3.5 percent, it bolsters the case for RBI to cut rates in May. However, since consumer price index is still high and is expected to remain in 9-10 percent band in next few quarters, it will limit the scope of further monetary easing beyond May policy. We expect the RBI to remain cautious in its forward guidance as long as food prices do not come down.

"The recent quantitative easing has so far had neither any adverse impact nor any positive impact on India, but such measures are inflationary in nature and RBI will look out for all such global impacts."

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"The fact that headline inflation is below 6 percent strengthens the case for rate cut in May. Going forward we sort of reworked the numbers given the current trajectory and we are getting phases where inflation is staying below 6 percent for 3-4 months at a stretch and we are sort of moving down structurally, starting from around August to November and then it ticks up again.

"It is possible that in January there was a technical redistribution of bulk diesel prices and LPG prices.

"I think we are expecting two more rate cuts (including May) and having said that we should not forget that despite improvement in the headline inflation number, the CPI inflation remains elevated and may not come down much and there are other worries like current account deficit. Given these factors the prospect of aggressive cuts remains somewhat weak.

"We could see some flows into India (because of Japan's stimulus package) through the bond route and I am not too sure given the growth prospects here that it will drive a major equity rally but there is already talk of flows coming into corporate and sovereign debt, which is the principal driver. And, given the kind of high current account deficit, even with the flows that come in, we will just about have enough, and it will give us the opportunity to build our reserves."

SEAN CALLOW, SENIOR CURRENCY STRATEGIST, WESTPAC BANKING CORPORATION, SYDNEY

"The downside surprise on inflation consolidates the case for a May RBI rate cut to support a sluggish economy. However, the improvement in inflation is only likely to allow for one 25 basis point easing this year, with rates on hold during H2 2013."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"The easing in March has happened on account of a significant decline in global commodity prices and growing deflationary trends in manufacturing sector. Even core inflation has fallen to 3.48 percent. I expect RBI to reduce both the repo rate and CRR by 25 basis points each to ensure effective policy transmission at the upcoming policy on May 3.

"The Bank of Japan's quantitative easing will certainly have an impact on all emerging market economies including India as it will increase the flow of capital into their financial markets and create the risk of overheating, as their real sector activity is quite subdued."

RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS CAPITAL, SINGAPORE

"The revision in the January number was partly expected because the increase in fuel prices was not fully factored in. But despite the hikes in administered prices, the demand-side pressures are quite weak with the wholesale price index at 40-month low. The non-food manufacturing is at a 38-month low which was last seen in early 2010 when the RBI had started raising rates, essentially showing that there is a lot more room to cut rates to boost growth, if you compared the rates then and now. I think RBI will maintain with its pace of easing rates but sound a lot more dovish in its guidance in May."

RADHIKA RAO, ECONOMIST, DBS, SINGAPORE

"March WPI inflation retreated at a faster than anticipated pace, reflecting the moderation in food costs as also flagged by the CPI inflation outcome last week. While the currency movements partly mitigated the impact of the slowdown in the international fuel commodity prices, core readings remain subdued below the 4 percent mark. At the margin, we note the sharp upward revision in January numbers, thereby infusing some doubts on the true extent of deceleration in March.

"On rates, the RBI will be in a tough spot as the recent deterioration in the current account position warrants rates to be left high to cool the economy, though the softer inflation numbers provide a window to ease with an eye on supporting the faltering growth outlook. Odds for a rate cut in May have risen after today's numbers.

"Rising expectations that yen has resurfaced as the funding currency might be positive for flows into India on the favourable rate differentials. On the other hand, impact on inflation should be watched closely. While the latest round of QE by major global central banks has not translated into an upswing in commodity prices, revival of any such risks will threaten India's easing inflation threats."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI

"The current WPI print is encouraging and is expected to be considered credit positive for the forthcoming policy meet. The consistent moderation in the manufacturing inflation in general and core inflation in particular indicates a need for sentiment revival in the investment demand. However, the higher January revised number's along with expected slowdown in the fiscal execution might restrict the RBI hand in giving a big-size rate cut during first quarter of 2013/14. Based upon current scenario, though the probability of 25 basis points rate cut might have increased, we still expect the central bank to offer a rate cut towards June policy meet and to maintain a growth supportive tone."

ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT, MUMBAI

"WPI inflation has come in below market expectations on lower food prices driven by the base effect. Headline inflation for March is well below RBI's projections and core inflation around 3.4 percent augurs well for another rate cut. Seen along with the recent fall in oil and gold which remedies the current account, monetary policy space improves for a 25 bps rate cut in May.

"Revised data for January, we believe is largely due to the lagged change of bulk diesel and LPG which was already factored for in February. So the revisions should be not as high going forward."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

"A much lower than expected headline print and core inflation should provide the RBI with a comfort room to reduce repo rate by 25 bps in the May policy meeting. However, the significant upward revision in the January print is likely to weigh down on more rate cuts, as of now, after May."

NITESH RANJAN, ECONOMIST, UNION BANK, MUMBAI

"Inflation was likely to be lower this time given significant correction in PMI input-output prices for March; however, the provisional data is a big positive surprise.

"Inflation below 6 percent level provides room for RBI to ease the policy rate next month. We are expecting a 50 basis points policy easing during the first half of the current fiscal year. What would be more important to watch out is transmission to credit markets which has been quite subdued in recent past."

ANJALI VERMA, ECONOMIST, PHILLIPCAPITAL, MUMBAI

"It is a fairly good number, in line with my expectation of 6 percent. The spike in the January number is due to the revision in the LPG and bulk diesel prices. I am expecting inflation to fall further below 6 percent and continue the downtrend till October. This reinforces my call for a 25 basis points rate cut in the May policy."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The decline in core inflation represents compression in demand which is comprehensive. And this was corroborated with the PMI data as well. The recent sets of data indicates that a 25 basis points rate cut is on the cards along with measures to support liquidity, which could be combination of cash reserve ratio cut and open market operations. However, we expect CRR cut of 50 basis points for the entire 2013/14 year.

However, there has been a sharp revision in the inflation data for January, and we need to monitor reasons for that adjustment, and then we can take a further call."

MARKET REACTION

* The benchmark 10-year bond yield initially dropped 3 basis points to 7.82 percent on the March inflation data but the revision in January prompted investors to trim their positions, pushing the yield to 7.84 percent. It had closed at 7.87 percent on Friday.

* The partially convertible rupee trimmed losses to trade at 54.65/66 per dollar from 54.71 before the data.

* The benchmark 30-share index .BSESN immediately extended gains to be up 0.5 percent from 0.3 percent beforehand, while the 50-share NSE index .NSEI extended gains to 0.7 percent. Both the indexes soon trimmed gains on the back of revised data.

BACKGROUND

- India's industrial output barely grew in February and retail inflation edged towards single-digits in March with the first fall in six months, adding to expectations the central bank will make a cautious interest rate cut next month.

- Headline inflation is expected to average around 6.5 percent this year, above the Reserve Bank of India's perceived comfort level of around 5 percent, reducing the chances of aggressive policy action to pull the economy out of its slowest pace of expansion in a decade. Economic growth is seen subdued at 6 percent in 2013/14 and any recovery will be gradual, a Reuters poll of economists showed.

- Finance Minister P. Chidambaram will seek to drum up foreign investment from the United States and Canada this week to fund a record high current account deficit, even as policymakers debate the risks of over-reliance on foreign investors to finance the gap.

- Annual car sales fell for the first time in a decade in the financial year just ended and are expected to post subdued growth this year, calling into question bullish expectations that fuelled billion-dollar bets from global manufacturers.

(Reporting by Treasury, Markets teams; Editing by Ranjit Gangadharan)

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