India inflation to trend lower in first quarter

KOLKATA: India’s inflation is expected to trend lower during January-March, the Reserve Bank of India Governor Duvvuri Subbarao said yesterday, a month after he had indicated the central bank might ease monetary policy as early as January.
“It (inflation) has come down from its peak, but at 7.50 percent, inflation is still high,” he said after the central bank’s board meeting in the eastern city of Kolkata.
“We are expecting that inflation will trend down starting the fourth quarter of this fiscal year. As we go into our mid-quarter policy on Dec. 18 and the quarterly policy on Jan. 29, we will take into account the growth-inflation trajectory and calibrate our monetary policy accordingly.”
The headline inflation rate, based on the wholesale price index, rose an annual 7.45 percent in October, the slowest pace in February.
The RBI projects WPI at 7.5 percent at March-end, after revising the projection upwards twice earlier this year.
The Indian central bank, which was a hawkish outlier long after many central banks began loosening policy, has refrained from lowering rates following sticky and elevated inflation since the April rate cut despite slowing growth.
However, pressure from government and industry bodies has mounted over the last few months to cut policy rates due to the sharp slowdown in economic growth.
India’s services sector, which makes up nearly 60 percent of economic output, grew at its weakest pace in over a year in November, an HSBC services Purchasing Managers’ Index, showed on Wednesday.
In the October review of the monetary policy, Subbarao said there was a “reasonable likelihood” of further easing in the January-March quarter.
The rupee rose for a third session yesterday, marking its sixth rise in seven days, as the decision of a key ally to support the government on the retail FDI issue in the upper house is likely to help the government win the vote.
On Wednesday, India’s ruling coalition won a vote in the lower house on allowing foreign supermarkets to operate in the country, in a key test of support for Prime Minister Manmohan Singh and his flagship economic reform.
“The win in the lower house was already mostly discounted by the market but the upper house win helped the rupee break the 54.25 level. The overall target now is 53.20,” said Vikas Babu Chittiprolu, a senior foreign exchange dealer with Andhra Bank.
Traders said the rupee moved in a wide 54.04 to 54.5775 band with dollar demand from oil and gold importers pushing it lower and prompting exporters to step in and sell the greenback, thus, limiting a sharper fall.
The partially convertible rupee closed at 54.1350/1450 per dollar, 0.75 percent stronger than its close of 54.54/55 on Wednesday. The unit rose as high as 54.04, its strongest since Nov. 7.
Sentiment toward the Indian rupee improved over the past two weeks and net short positions on the unit fell by over two-thirds, a Reuters forex positioning poll on Thursday showed.
Traders said a recovery in the domestic share market also helped sentiment for the rupee in the second half. Indian shares gained 0.5 percent, its third consecutive rise.
Rupee could rise to 52 per dollar by the end of 2013 and is Credit Agricole’s top pick among the emerging markets, it said in a note earlier in the day.
The government’s win in the lower house would continue to help the rupee despite questions on whether the reform would be approved by the upper house and concerns about its implementation.
“The government’s victory is a good sign of its ability to push through other reforms,” Credit Agricole said.
In the offshore non-deliverable forward, the one-month contract was at 54.42 while the three-month was at 54.94.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.2850 with a total traded volume of $ 6.30 billion.