India?s Inflation Rises To 7.55% In May; RBI Expected To Cut Rates

The Reserve Bank of India is scheduled to hold the mid-quarter policy review- where it decides the monetary policy - next week.

Inflation reached near its highest level this year as food and fuel prices shot up in the month. The WPI inflation for April stood at 7.23 percent and the government had revised March inflation data to 7.69 percent from the previously reported 6.89 percent. Build up inflation in the financial year so far was 1.80 percent, compared to a buildup of 1.94 percent in the corresponding period of the previous year.

According to the data released by the Ministry of Commerce and Industry, the primary articles which weigh 20.12 percent on the index rose by 0.1 percent to 216.1. The index of food articles group declined 0.1 percent while the index for non-food articles rose 1.7 percent.

The food inflation remained in double digit at 10.74 percent, compared to 8.25 percent in the same period last year. Vegetable prices shot up by 49.43 percent in May, compared to a decline of 0.66 percent in the same month in last year.  Egg, meat and fish prices rose 17.89 percent in May, compared to 6.59 percent in the same period a year ago, and milk prices was up 11.90 percent in May. 

 The index for 'Minerals' group declined by 1.4 percent to 357.0 from 362.1 for the previous month due to lower prices of barytes (5 percent), iron ore and copper ore (3 percent each) and zinc concentrate, steatite and crude petroleum (1 percent each). However, the prices of gypsum (16 percent), sillimanite (3 percent) and chromite and magnesite (1 percent each) moved up, according to the WPI report.

Fuel and power group with 14.91 percent weightage on the index increased by 1.0 percent to 178.9 due to price hikes in petrol (3 percent), bitumen and lubricants which rose by 2 and 1 percent respectively.

The manufactured products group, weighing 64.97 percent on the index, rose 0.5 percent to 144.3. Under the group, food products increased 0.9 percent, beverages 0.1 percent and textiles 0.8 percent.

According to analysts, inflation index has risen in expected lines and the Reserve Bank of India will be forced to cut interest rates next week to support growth. The core inflation still remains under 5 percent and analysts feel this will give elbow room for the central bank to go ahead with the interest rate cuts.

Despite a rise in headline inflation in May, we think the Reserve Bank of India is likely to cut the repo rate by 25bp at its rate-setting meeting on Monday. The underlying inflation rate has not risen and the central bank will want to respond to the sharp slowdown in growth over the past six months, a Capital Economics analysis said.

It is also possible that the RBI will reduce the cash reserve ratio further, following cuts of 125bp earlier this year, which brought the ratio down to just 4.75%. Banking industry representatives have lobbied for a further reduction of the reserve ratio in recent days, arguing that this would have more impact on bank lending than a cut in the repo rate, it said.

Inflation will inch up further as we might have revision in diesel prices. There is a 50:50 chance of a rate cut next week. Growth has slowed and the RBI may opt to support growth, the Economic Times quoted D.K. Joshi, chief economist at ratings agency Crisil, as saying.

Meanwhile, responding to the increasing inflation, Indian Finance Minister Pranab Mukherjee said that he was confident that range of inflation would be around 6.5-7.5% throughout the year. I hope if monsoon is quite good, then it would be possible that this type of pressures would be sorted out.