Continuing its downward journey, retail inflation eased in April 2015 as well. Food inflation which constitutes a significant proportion of Consumer Price Index (CPI) measuring the inflation at retail level has been easing of late. Despite unseasonal rains damaging Rabi crop worth nearly Rs 7,000 crore, food prices have been dropping. As a result, retail inflation measured by the movement of CPI has slipped to 4.87% in April from 5.17% in March.
 

Retail Inflation on Slippery Path...

(Source: MOSPI, PersonalFN Research)  

On the other hand, industrial growth measured by the movement of Index of Industrial Production (IIP) slowed down to 2.1% as against 5% recorded in February this year. This has given rise to expectations that, the RBI may reduce policy rates going forward. Whether RBI does so indeed, yet remains to be seen. PersonalFN brings to you thorough analysis of these macroeconomic developments. PersonalFN also provides you some insights into what stance RBI may take at its 2nd bi-monthly monetary policy scheduled on June 02, 2015.

What caused inflation to go down?

Expectations of analysts were belied as food inflation slowed to 5.11% in April from 6.14% in March as vegetable prices cooled in the market on improved supply. Vegetable inflation eased to 6.63% in April from 11.26% in the previous month. Inflation in clothing and footwear eased further to 6.15% versus 6.27% in March, while that in the fuel and lighting segment inched to 5.60%from 5.07% per cent in March. Lower inflation experienced in protein rich foods has also led overall inflation to drop below 5%.

Industrial production slowest in five months....

Industrial activities waned in March. Lacklustre growth of 2.2% recorded by manufacturing sectors, 0.9% growth in mining industries and 2.0% growth recorded by electricity and allied sectors, dragged the IIP number. Growth of 2.3% in basic goods industries and 7.6% in capital goods appears discouraging. This also points at sluggish recovery in capex cycle.

Impact on markets

Equity as well as debt markets remained unimpressed with falling inflation. Muted industrial growth has been a problem for a while now. On the day of release of data, yields on India’s 10-Year benchmark bond hardened signalling that fall experienced in inflation has been already factored into bond prices. On the contrary issues such as increasing crude oil prices have been affecting the sentiment of investors. Similarly, equity markets maintained negative bias.

On this backdrop RBI monetary policy review becomes an important event to track.

Is rate cut on cards?

The central bank had kept rates unchanged in its April 7 policy review on the expectation that the unseasonal rainfall may cause a spike in food inflation. There are worries of deficient rainfall. Indian Meteorological Department (IMD) has predicted that the monsoon this year is likely to be 93% of the Long Period Average (LPA) with a chance of ± 5% error. CPI is still well within the RBI’s limit of 6 % which is to be achieved by January 2016. RBI would track its progress going forward.

Lower inflation and weaker manufacturing growth gives RBI some headroom to lower policy rates. However, it may refrain from taking any such action atleast in the 2nd bi-monthly monetary policy scheduled at June 2, 2015. As long as upside risk to food inflation persists (stemming from possibility of below average monsoon) it is unlikely that RBI may lower policy rates in a hurry. Meanwhile, Skymet has predicted a timely arrival of monsoon. Initial rainfall and its progress thereafter may give RBI some comfort in deciding about policy rates.

Moreover, RBI was also concerned with banks not passing the benefits of previous rate cuts to borrowers. Taking a corrective measure, some large lenders have slashed their base rates marginally in the recent past. Lower base rates make all floating rate loans cheaper. RBI may like to see the impact of previous rate cuts on economic growth before it accords further rate cuts.

Considering aforementioned factors PersonalFN believes, RBI may maintain status quo until it is convinced with the fall in inflation. Fiscal deficit number, value of rupee and monetary policy stance of Federal Reserve (Fed) in the U.S. are among other factors that may influence the decision of RBI. The central bank may also be keen on monitoring the progress of the Government on improving the state of physical infrastructure and introducing structural reforms to curb supply side constraints causing higher inflation.

PersonalFN is of the view that, investors should remain careful while they place bets on equity as well as debt basing their decisions upon growth and inflation numbers. PersonalFN always discourages investors for speculating on any macroeconomic developments. Such approach may prove harmful to your portfolio. Instead, PersonalFN suggests that you should focus on achieving your financial goals by investing as per your personalised asset allocation. While you do that, it is important for you to consider your risk appetite.

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