Inflation up in May but RBI may still cut key rates due to fall in exports.

NEW DELHI: Inflation in India quickened in May, but most economists still believe the Reserve Bank of India, or RBI, will cut rates as a fall in exports in the same month accentuated concerns that the economy is at a standstill.

Wholesale price inflation, the most widely-used gauge of prices in India, rose to 7.55% in May from 7.23% in April on the back of double-digit inflation in food articles, data released by the government on Thursday showed.

Core inflation, a measure of demand pressure, rose marginally to 4.9% in May from 4.8% in April. Exports fell 4.2% in May from a year ago, heightening slowdown fears after industrial growth came in flat in April. The economy expanded 6.5% in 2011-12, a nineyear low, increasing the pressure on the RBI to cut rates to revive investment and spur growth.

"Despite the continuing persistence in headline WPI inflation, the fall in manufactured goods inflation gives room to the RBI for further easing its monetary policy stance," said Saugata Bhattacharya, economist, Axis Bank.

Before Thursday's inflation data, the Reserve Bank was widely expected to cut repo rate, or the rate at which it lends to banks, by 50 bps after a similar cut in April. But the uptick in inflation has raised doubts about the extent of monetary action.

Driven by Primary Products

"A combination of a 25-bps repo rate cut and 50-bps CRR cut could bring down effective interest rates appreciably, helping investor and consumer sentiments," said Taimur Baig and Kaushik Das of Deutsche Bank. "Our view is that the RBI will support growth by cutting repo rate by 25 bps on June 18 (and by a total of 50 bps in 2012), but with no cut likely in the CRR," according to Nomura's Sonal Verma.

The upward revision in inflation for March to a high of 7.69% from 6.89% estimated earlier also suggested lesser softening of prices than initially estimated. The final inflation reading for May could also come in higher after the full impact of the sharp depreciation in the rupee shows up.

The benchmark Sensex dropped 1.02% on Thursday on fears that the RBI may not come up with a rate cut. The rupee fell and bond yields rose. The government took heart from the steady decline in core inflation since December, the rate of price rise in non-food manufactured products while attributing the sharp rise in food inflation to seasonal factors.

"I am 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," said Pranab Mukherjee.

Inflation in food articles climbed to 10.7% in May from 10.5% in April, partly because of the base effect as the index declined 0.05% during the month, and will inch up higher after revised MSPs for food products are announced.

"Clearly, there is scope for an upside move as MSPs are supposed to be revised upwards and there is uncertainty on the monsoon front. Adding to all of this are the existing supply constraints," said Upasna Bhardwaj, India economist, ING Vysya Bank.

Source : economictimes.indiatimes.com