Lower inflation gives RBI space to cut rate

Moderating inflation will provide ‘greater space’ to the Reserve Bank to cut interest rate to promote sagging growth, Prime Minister Economic Advisory Council Chairman C Rangarajan.

"I would say that decline in WPI is higher than what was expected. It gives greater space for monetary authority to act," he said while unveiling the review of economy for 2012-13.

Wholesale Price Index for the month ended March moderated to 3-year low of 5.96 per cent against Reserve Bank's projection of 6.8 per cent.

However, he said, inflation continues to remain high, but there are definite signs that headline WPI inflation is coming down.

"Non-food manufacturing inflation remains around the comfort zone.

“As inflation comes down, it will create more space for monetary policy to support growth," he said.

Giving projections for the next fiscal, Rangarajan said, "the headline WPI inflation is expected to be around 6 per cent, with primary food inflation around 8 per cent, fuel at about 11 per cent and manufactured goods at around 4 per cent."

RBI Governor D Subbarao will announce the Monetary Policy Statement 2013-14 on May 3.

In its last policy review in March, RBI slashed short- term lending rate by 0.25 per cent to 7.5

per cent.

Accordingly, the short-term borrowing rate came down to 6.5 per cent.

However, the Cash Reserve Ratio was retained at 4 per cent on expectation that government will start spending more.

Even Finance Minister P Chidambaram earlier this month had favoured further interest rate cut by the Reserve Bank as headline inflation has softened.

"I think at this time perhaps there is still a room for cutting interest rates, but let me add . . .That is the call the (RBI) Governor has to take," he had said.

As per the CSO estimates, Indian economy is expected to grow at decade low of 5 per cent during 2012-13.

On the exchange rate, Rangarajan said, "We think that Rupee will stabilise at a level we are seeing.

At the current exchange rate, merchandise trade deficit is estimated to be USD 200 billion or 10.9 per cent of the gross domestic product in 2012-13.

It is projected at $213 billion or 9.9 per cent of gross domestic product in 2013-14, he said.