Core inflation down – rate cut hopes up

MUMBAI: The dip in core inflation figure for February 2013 published today has fuelled up the hopes for a rate cut when RBI meets to review monetary policy on 19th March. However, things are not all that comfortable with consumer price inflation (CPI), rural inflation and fuel costs remain high.

The February WPI rose 6.84%, marginally above estimates on higher fuel & power inflation even as core inflation further cooled-off to 3.8%— the lowest since Mar’10. “The downward trajectory in core inflation continues to reflect macro weakness, comforting to the RBI as it goes about reducing the cost of funds in the system. We read -25bps on the 19th, and another 50bps through the year,” noted a report from Religare Securities.

Economics Research Group of ICICI Bank is also of the view that RBI would reduce rates on 19th. “While the headline WPI inflation has risen against expectations, the sharp decline in core component is very encouraging and leads us to retain our 25 bps repo rate cut call in the March 19th RBI mid-quarter review. Further, Subbarao’s recent comments have reinforced our view,” it mentioned in its report.

However, not everyone is expecting a rate cut immediately. “Divergence in CPI and WPI reading has widened considerably over 400bps in last two months. This is in continuance with the earlier trend of prices at retail level remaining firm as compared to lower inflation reading as indicated in the WPI index,” pointed out a report by Karvy. CPI increased to 10.90% YoY in Feb’13 as compared to 10.79% in Jan’13 on spike in meat & fish and transportation & communication numbers. Rural inflation remained higher at 11.01% YoY as compared to 10.84% in urban areas. The research house expects RBI to take a pause on 19th March and reduce rates only at the time of annual policy review.

A report from brokerage house Anand Rathi also noted its expectation that RBI will maintain status quo in March ’13 and cut repo rates by 50 basis points in May 2013.