Inflation drops below 6%

Headline inflation fell to its lowest in over three years in March, giving an unexpected gift to Finance Minister P Chidambaram as he begins a tour of Canada and the US to woo foreign investors.
The decline in inflation, coupled with a sharp fall in international crude and commodity prices in the last few days, sparked a rally in the stock and bond markets. The rupee trimmed losses in the hope that the Reserve Bank of India will cut interest rates in its upcoming monetary policy review on May 3, to stimulate the economy growing at its slowest in a decade. Wholesale price inflation, the most widely watched measure of prices, dropped to 5.96% in March from 6.84% in February. This marks the lowest inflation reading since November 2009, though the sharp upward revision in the inflation number for January to 7.31% from 6.62% muted the celebration because of fears that the March numbers could also change.
Core inflation (inflation in non-food manufactured products), a key indicator of demand pressure, fell to a 36-month low of 3.41% in March, compared with 3.77% in February, the seventh consecutive month of easing.
Though RBI had cut repo rate by 25 basis points on March 18 despite an uptick in inflation in February, in its commentary it had asserted that room to cut rates further was limited. The decline in inflation has, however, raised hopes of at least a 25-basis-point rate cut in May, more so after industrial production rose only 0.6% in February from a year ago.
However, the record current account deficit (CAD) of 6.7% of GDP in the October-December quarter is likely to inhibit RBI from aggressively easing monetary policy, something that Indian industry has been urging for some time. Aggressive rate cuts could increase demand, which may further widen current account deficit, exacerbating the external imbalance that has weakened the rupee and sparked concerns over India’s ability to finance the large gap.
The decline in inflation and hopes of further softening in commodity prices will allow Chidambaram to tell international investors that India was getting its act together after his budget met fiscal deficit targets.
This is the third leg of his visit to prominent financial centres to woo investors to fund the record-high current account deficit. In his week-long visit, the finance minister will interact with investors in Toronto, Ottawa and New York before heading to Washington to attend the IMF/World Bank Spring meetings. The fall in inflation was because of a dip in food inflation to a five-month low of 8.73% in March versus 11.38% in February. Vegetables recorded a deflation of 0.96% during the month whereas the rate of price rise in potato and onion came down substantially.
Food inflation was in double digits last March. Consumer price inflation has dropped, too, data released on Friday showed, though it remains in double digits at 10.39%, largely because of nearly 50% weightage to food items in the retail index.