Inflation has come in at 8.90% for week ended November 8 versus 8.98% during the previous week. Inflation for week-ended September 13 has been revised to 12.42% versus 12.14%.

Even as inflation has come down steadily since hitting a peak during August, banks have not cut prime lending rates (PLRs) at the same pace at which the Reserve Bank of India (RBI) has cut rates. Indranil Pan, Chief Economist, Kotak Mahindra Bank, attributes it to the presence of risk perception in some segments of the economy. “That’s the reason some of the de-clogging in the system has not yet happened and that’s one of the major reasons why borrowing rates of corporates are on the higher side,” Pan said.

Pan also said that most of the foreign sources of funds have dried up for corporates. “The ECBs (external commercial borrowings) have dried up and the FCCBs (foreign currency convertible bonds) have risks in terms of repayments. Short-term debt is also a risk factor,” he said, adding that, “With all the foreign lines of credit drying up, there is a big reliance of the corporates whose projects are getting stuck to revert back to the domestic market. That is also the reason why you might not see lending rates from the banking segment or the borrowing rates of the corporates coming down very rapidly.”

“With global equity markets continuing to fall and the global situation not really looking significantly better even after the Fed has reduced rates significantly, there is little chance of resource scarcity in the domestic economy so far as we are talking about the reliance on the rupee funds having increased for the corporates domestically,” Pan said. “So it is difficult to see the lending rates crashing down immediately in equal proportion with what the policy rates have come down.”

Reacting to the cooling-off inflation numbers, Shubhda Rao, Chief Economist, Yes Bank, said, “The trend is quite clear that inflation is now very clearly on the softer patch.” Rao added that inflation could be headed for a substantive fall next week. “ATF [air turbine fuel] is slated to get lowered by another 12% so from 8.9%, we could see [inflation heading to] anywhere below the 8.8-8.7% band.”

The south-bound inflation, Rao said, was driven by softening manufacturing and fuel prices. “Manufacturing prices have come down to 8.06% in the last week’s index numbers — they had touched a peak of 11.93% sometime during August end. The fuel basket too has turned around the inflation momentum,” she said.

Rao said she sees inflation in the 4.75%–4.85% range by the end of March if the current trend continues and we see rapid fall in fuel prices. “However, that still takes the annual inflation number well over 8.5% or so. But the key to this is that inflation no longer remains a concern for monetary policy,” she added.

Rao added that she expects to see some action coming from the Reserve Bank of India. “Within the next fortnight, it would be good to see RBI action coming in the monetary measures — I would also look at liquidity measures because there may be liquidity in the system but it remains highly skewed,” she said. “We would like to see more measures on liquidity side as well as the repo and reverse repo.”