High inflation may moderate in 2013; to prompt RBI rate cut

New Delhi: Inflation may moderate in the new year on easing of supply constraints after remaining stubbornly high for the whole of 2012 despite efforts by the government and the Reserve Bank to check rising prices of food items.

The wholesale price-based (WPI) inflation hovered over seven per cent through 2012, down from 10 per cent inflation seen in the previous year, reflecting the impact of tight money policy of the RBI.

Retail inflation, based on consumer price index (CPI), remained close to double digit at 9.90 per cent in November. The central bank had hiked key policy rates 13 times by 3.75 per cent between March 2010 to October 2011 to tame the rising inflation.

As inflation showed some signs of easing thereafter, the RBI lowered policy rates by 0.50 per cent in April 2012. Despite pressure from the government and the industry, the RBI kept its policy rates unchanged evoking criticism from the Finance Ministry which wanted the apex bank to take steps to promote growth.

Hours after the RBI unveiled its second quarter policy review on October 30, an apparently disappointed Finance Minister had said: "Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone

"Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence".

A faltering economic growth was a bigger concern for the policymakers as they tried to boost investments and speed up the growth engine. Economic growth in the first half of the current fiscal has declined to 5.4 per cent from 7.3 per cent a year ago and is estimated at around 5.7-5.9 per cent during 2012-13.

The RBI, however, has indicated that in view of the likelihood of inflation moderating further, it could go in for a rate cut in its third quarter policy review in January.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the RBI said in mid-quarter policy review on December 18.

The WPI inflation in November stood at 7.24 per cent. During 2012, the highest rate of price rise was witnessed in August when inflation stood at 8.01 per cent.

The decline in inflation could be attributed to fall in prices of manufactured products, primary articles and power. Inflation, however, increased in crude petroleum, non-food articles, cereals, protein foods, edible oils, beverages and tobacco products.

Rise in food items has been a major source of high inflation mainly on account of persistent supply constraints in many protein items. The government attributed persistent inflation to higher international crude prices, change in dietary pattern and revision in MSP on some of the essential commodities.

The government in the Budget undertook a number of measures like augmenting supply and improving storage and warehousing facility. The Centre anticipates the RBI would adopt an accommodative monetary policy as inflationary pressures arising out of excess demand would ease.