RBI March rate decision - between a rock and a hard place!

RBI's March 19 monetary policy may be closer than the consensus expects ...

Most economists are expecting a 25 basis points cut in the policy repo rate to 7.50% while opinion is divided over a further cut in the cash reserve ratio (CRR).  To review, the RBI reduced the repo rate by 25 basis points to 7.75%, and also cut the CRR by 25 basis points to 4.0% in late January.  Rate cut advocates cite sluggish GDP growth (below 5% in the December quarter) and the decline in core manufacturing WPI. 

... with the continuing disconnect between the wholesale price index (WPI) and the consumer price index (CPI).

India's February CPI (yoy basis) climbed further to 10.9% from 10.8% in January 2013, the highest reading for CPI inflation over its short history.  By comparison, February WPI was 6.8%, the second lowest reading in more than three years (January 2013 at 6.6% was the lowest). The divergence can only partly be explained by the higher weighting of food and food products in the CPI (46%) versus the WPI (24%). Food inflation has been running higher than headline inflation for both the indexes - CPI food inflation was 13.4% in January while WPI food inflation was 10.2%. Indian policy makers and analysts (present company included) have historically focused on the WPI (in contrast to the CPI focus for most other economies) because of its timeliness and breadth; the new comprehensive CPI (rural and urban) with monthly readings was introduced only in January 2011.

Especially as the core inflation measures for the two indexes also diverge significantly.  

The decline in WPI inflation is driven by the moderation in core manufactured products (excluding foods) inflation - core manufactured products inflation declined to 3.8% in February 2013 (the lowest reading in almost three years) from a near-term peak of 8.4% in November 2011. Even seasonally adjusted trends for core manufacturing WPI suggest that inflation pressures are contained.

By comparison, core CPI inflation (excluding food and fuel) remained elevated at 8.4%, having troughed at 8.0% in September 2012. Cutting the repo rate (which is already slightly negative based on the core CPI) given the elevated and sticky CPI inflation would be hard to justify given RBI's stated focus on containing inflation as well as supporting growth.