Falling inflation raises hopes of a rate cut sooner than later

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Falling inflation raises hopes of a rate cut sooner than later
There's seldom been good news for the Indian economy in the last few months. However, good news seems to be coming in bits and pieces.

First, it was in the form of the current account deficit, which has reached levels that are no longer frightening and now it's declining inflation.

Two sets of data released on inflation shows a very encouraging trend. The CPI inflation came in at a two year low of 8.70 per cent for the month of January, from 9.87 per cent on Dec. A sharp decline in food prices, led by vegetables was largely responsible for the sharp decline in the CPI.

On Thursday government data showed that WPI inflation for the month of January came in at 5.05 per cent, way below analysts expectations of a number of 5.5 per cent.

If the trend continues in the next few months, expect the RBI to cut rates sooner than later. In fact, economists now believe that rate hikes may see a pause and a reversal in hikes is possible in the second half of the year.

This is primarily on account of the fact that industrial growth has slumped and lower interest rates could once again boost the investment climate.

The only hitch for a decline in interest rates is the fact that the core inflation has not been dropping. Also, food inflation numbers can get erratic and rise once again, putting pressure on the WPI and CPI.

In any case the decline in inflation is welcome and now raises hopes of an interest rate cut, sooner than later.


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