Rupee strengthens, Sensex gains on 4.7% WPI-based inflation; all eyes on RBI

Ahead of Monday’s monetary policy review by the Reserve Bank of India, Wholesale Price Index (WPI)-based inflation fell to a 43-month low of 4.7 per cent in May from 4.89 per cent in the previous month, official data showed on Friday.

Wholesale inflation has declined for a fourth month in a row and stayed within RBI’s comfort zone — four to five per cent — for a second month, fuelling buying in stock markets on hopes of a rate cut.

The BSE benchmark Sensex, which rose for the first time in four days on Friday, gained 350.77 points to close at 19,117. The rupee appreciated to close at 57.53 on Friday, against yesterday’s 57.99.

The rate of inflation was 7.55 per cent in May 2012. The level of rise was previously lower than May 2013’s level only in October 2009, when the rate was 1.79 per cent. (RBI’s DATA DILEMMA)

Food inflation rose to 8.25 per cent in May from 6.08 per cent as rice, onions and non-vegetarian items continued to see price pressure.

Consumer Price Index (CPI)-based inflation had remained elevated at 9.31 per cent in May. This, coupled with the rupee depreciation, presents a difficult choice to RBI on whether to cut the policy rate to spur lacklustre economic growth.

But authorities were optimistic the central bank would take cognizance of the declining rate of wholesale inflation. “They (RBI) should certainly consider it because it is very clear that the underlying inflationary pressure is softening,” Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters.

Finance ministry officials said they would want lower interest rates and monetary policy transmission. Business lobbies, too, asked RBI to cut the policy rate to perk economic growth. Industrial growth had remained muted at 2.3 per cent in April, and the larger economic growth had fallen to a decadal-low of five per cent in 2012-13.

Some independent economists said the central bank would not cut the policy rate. “The sharper-than-expected uptick in food inflation would moderate the optimism following the encouraging progress of the monsoon. Moreover, the considerable rupee depreciation is expected to boost prices of imported products in the near term, posing a concern for RBI,” Icra senior economist Aditi Nayar said. There were pressures from the size and financing of the current account deficit in the first quarter of 2013-14, from rising gold imports and from withdrawal of money from foreign institutional investors, she added.

Source: Business Standard

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