Drop in inflation can pave way for rate cut: India Inc

Inflation easing to three and a half year low levels in May paves the way for the Reserve Bank of India (RBI) to cut interest rate on June 17, India Inc said on Friday.

Industry chamber Ficci asked the RBI to consider a rate cut and persuade banks to pass on benefits to borrowers.

"With the downward trend in the prices holding on, RBI can consider a cut in the policy rate in the forthcoming Monetary Policy Review," it said.

Echoing similar views, Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII), said, "As non-food manufacturing inflation, which is widely used by RBI as an indicator to track the demand side pressures on the economy, has been showing a secular downward trend, it should encourage the Reserve Bank to cut interest rates in its forthcoming Monetary Policy review slated for June 17."

While the apex bank has lowered interest rates by 1.30 per cent since January 2012, the banks have cut lending rates by only 0.30 per cent.

Macroeconomic signals continue to remain unimpressive with industrial output grew at a meagre 2.3 per cent in April.

WPI-based inflation fell to 4.7 per cent in May, driven mainly by declining prices of manufactured items, even as prices of food articles inched up.

Declining for the fourth straight month, this is the lowest level of inflation since November 2009 when it was 4.50 per cent.

Inflation based on the wholesale price index (WPI) stood at 4.89 per cent in April. In May, 2012, it was 7.55 per cent. Another industry chamber, Assocham said both government and the monetary authority need to focus on boosting the economic growth.

"The need of the hour is to boost the investor sentiment. The RBI has to ensure that the cost of finance to the end-user becomes competitive without any further delay," Assocham secretary general D S Rawat said.

However, CII said, the cause for concern is the resurgence in food inflation owing to a moderate rise in prices of fruits and vegetables, onion, milk, eggs, cereals and rice.

Going forward, the prospects of a good monsoon may dampen food prices, it added.

To check the rise in food prices, the chamber said, it is imperative to take urgent steps to undertake reforms for addressing supply-side bottlenecks like delisting perishables from Agriculture Produce Marketing Committee Act (APMC) and permitting farmers to sell their produce in the open market.

Inflation in food articles category, which has a 14.34 per cent share in the WPI basket, however, rose to 8.25 per cent in May. It was at 6.08 per cent in April.