Finally, the inflationary pressure seems to be easing. The WPI inflation has been on the decline since January 2013, and so is CPI inflation. For the month of April, CPI (combined) inflation was 9.4%, down from 10.4% in March 2013 – a full one percentage point decline. The WPI data for April (out today) stands at 4.89%, down from 5.96% in March 2013. So, inflationary pressure is lessening.
This is encouraging for the economy and business, and we have reasons to relax a bit. What is more, we may expect another 25 basis point cut in the policy rate soon. When we will get to know the final estimate of GDP growth, we will probably see it at below 5 per cent. We still do not have idea of Q4 GDP growth. It may be a shocker, when it comes. But that (falling GDP growth) alongside falling inflationary pressure will make a sound case for substantial cut in the policy rate, of the order of 50 basis point.
This, however, is not likely to happen at this moment, mainly because of the continuing and unabated pressure on the current account deficit (CAD). Fall in international gold price has caused a rush for gold import here, and has been pushing up trade deficit. Inflationary pressure remains with rising trade deficit and CAD. RBI knows this. So, expect the RBI to loosen the neck tie and open the neck button, but not the chest button. What I mean is, you expect a 25 basis point rate cut.
Going ahead, if the WPI and CPI remain on the come down and world economy is steady on recovery, there may be room for more cuts, as we go along. My hunch is that in the coming months to December, 2013, we may see a two-stage cut in the policy rate, aggregating 50 basis points. This seems quite a rationalistic expectation!