Industry urges RBI to cut rates as deflationary trend persists

With inflation remaining in the negative territory for the 14th straight month in December, India Inc today said the trend indicates weak demand, nudging Reserve Bank to cut the benchmark rate to aid industrial recovery and boost economic growth. Deflationary trend eased in December with WPI inflation moving up to (-)0.73 percent as food articles, mainly vegetables, turned costlier. "The continuation of the deflationary trend is an indication of weak demand, besides being the spillover effect of lower oil and commodity prices.

The latest data on industrial production once again highlights the precarious nature of recovery in this sector. "We hope the central bank will respond to the situation appropriately and take steps that would aid the process of industrial recovery. At this juncture, propelling growth and creating jobs should be a priority and all policy levers should be geared towards that objective," Ficci Secretary General A Didar Singh said.

The Wholesale Price Index-based inflation has been rising for the last four months and was (-)1.99 percent in November. In December 2014, it was (-)0.50 percent. "While inflation is within the manageable limits, the focus of the government and RBI should now shift to revive GDP expansion and industrial growth, especially the poor performance of capital goods and manufacturing sector as seen in the recent IIP numbers needs to be looked into immediately," Assocham President Sunil Kanoria said.

The chamber said it expects RBI to intervene and arrest the fluctuations in Indian market arising from the US Fed policy such as massive amounts of pull back of foreign funds, increasing demand of dollar putting pressure on the rupee, thereby affecting business margins as access to capital from US has become expensive. "We urge RBI to cut its benchmark interest rates in its next bimonthly monetary policy since inflation as targeted by RBI is well within the range, therefore, creating a room for further rate cut to support demand in India," Kanoria said. Food inflation, however, shot up to 8.17 percent in December as against 5.20 percent in the previous month.

Reserve Bank may face pressure to reduce the key lending rate further as industrial production contracted by 3.2 percent in November, its sharpest decline in four years. Governor Raghuram Rajan had yesterday said the bank will carefully look into the latest data on industrial production, and come out with a "reasoned response". Besides IIP, the central bank also looks into retail inflation while firming up its monetary policy stance.

Retail inflation has been rising for five straight months and stood at 5.61 percent in December. RBI's next bimonthly policy review will be unveiled on February 2.