Crisil sees no room for rate cut on stick core inflation
Mar 31 2014 , Mumbai
"We may have come to the end of the interest rate tightening cycle. Rates, however, must remain on hold for now...No room for a rate cut anytime soon," Crisil said in a note.
The note said fall in retail inflation, which has declined from 11.2 per cent in November to 8.1 per cent in February, has been entirely driven by low vegetable prices, with hardly any downward adjustment in core CPI inflation.
As against the 3.1 percentage points fall in consumer price inflation during the three months, core CPI inflation has come down by only 0.1 per cent during this period.
Additionally, the data of the past eight years shows that there were supply side shocks on the food front for seven of those years in spite of the monsoon being normal.
"Thus, while the shock to vegetable prices may have abated, the possibility of another idiosyncratic shock to food prices remains high, even if monsoons this year are normal and demand-side pressures remain relatively low," it said.
Rajan will announce the monetary policy tomorrow and expectations of a status quo are rising ever since the official data on consumer price inflation for February pointed to a cool down to 8.1 per cent.
The number is much closer to the RBI target of getting it to 8 per cent by January 2015, but worries like unseasonal rains can make the situation tricky.
Rajan, who took charge last September, has built a reputation to surprise the markets. He raised the rates at his first policy announcement, rightly foreseeing a pressure on the inflation front and increased it again--the third time since he took charge--in January when the market was expecting a pause.