Will dipping inflation trigger RBI to deliver robust policy

WPI based Inflation has been on a declining trend and stood at 4.89 percent for April-13.

The Core Inflation, which is inflation in non-food manufactured products, eased to 2.77 percent in April-13. This goes to higlight the demand-constraining effect of high interest rates on the core manufacting products.

As a result, while RBI continues to provide emphasis on inflation management, the boosting of growth has acquired more focus offlate. We believe that in the backdrop of a normal monsoon, RBI would have a sizeable headroom to effect a more robust policy response to boost growth in the coming months.

Growth focus acquires all the more importance because the Indian economy has moderated significantly over the last 12-18 months. The average industrial growth in the last 12 months has been around 1.04 percent yoy.

With high borrowing cost, the industries and households continue to defer their investment and expenditure decisions respectively. This has led to slow down in aggregate demand leading to moderation in GDP growth.

The GDP growth has moderated sizeable into Q3-FY13 at 4.5 percent yoy. While it is expected that the economy may pick up some steam, it may take some more time to achieve pre-2008 levels.

This highlights that a structural imbalance may have got built-in; and may require a prolonged redressal needing a robust policy response.

Going forward, we believe that the central banker has increasingly begun to focus on growth revival as a primal policy stance in its formal statement. Additional headroom for policy is being created by the declining inflation and reducing crude oil prices internationally.

Moreover, if the brent crude continues to remain around the US$ 100 per barrel, the pressure of imported inflation may abate further. Over and above that, the moderating crude oil prices imply reduced import pressure; and thus may help alleviate the Current Account Deficit concerns. It is being estimated that the CAD in FY14 may come down to 3.9 percent of the GDP from the present levels. Therefore the possibility for benign monetary stance may only increase over a period of time.