Headline inflation falls to multi-year low of 5.96% in March, beats estimates

India's headline inflation fell to 5.96 per cent in March, the slowest in 40 months, from 6.84 per cent in February. The fall in inflation coupled with a slowdown in industrial growth have boosted hopes of a rate cut by the Reserve Bank of India (RBI) when it meets for a policy review on May 3.

The BSE Sensex jumped to the highest point of the day after the data was released.

"The annual rate of inflation, based on monthly WPI, stood at 5.96 per cent (provisional) for the month of March 2013 (over March 2012) as compared to 6.84 per cent (provisional) for the previous month and 7.69 per cent during the corresponding month of the previous year. Build-up inflation rate in the financial year so far is 5.96 per cent compared to a build-up rate of 7.69 per cent in the corresponding period of the previous year," the government said in a statement. Wholesale inflation has trended downwards from 8 per cent in September.

An NDTV poll of 10 investments banks had shown that wholesale prices, India's key inflation measure, likely eased marginally to 6.3 per cent in March 2013 from 6.84 per cent in February.

"Inflation behaviour is consistent with what the government has been saying -- that it is slowly coming under control," Planning Commission Deputy Chairman Montek Singh Ahluwalia said.

The encouraging inflation data was released as Finance Minister P. Chidambaram was set to begin a series of roadshows in North America aimed a drawing billions of dollars of investment. Foreign investment inflows are needed to help fund a gaping current account deficit that has emerged as a worrying faultline in Asia's third largest economy.

Reviving investment and economic growth remain the top priority of Prime Minister Manmohan Singh's government, which is gearing up for national elections due in early 2014.

India's persistently high food prices irritate voters and have tempered economists' expectations of aggressive monetary easing.

Inflation in the food articles category, which has a 14.34 per cent share in the WPI basket, declined to 8.73 per cent in March from 11.38 per cent in the previous month. The easing in food inflation was helped by a sharp drop in the prices of vegetables. Inflation in vegetables stood (-)0.95 per cent in March compared to 12.11 per cent in February.

Retail food prices rose at a slightly slower pace in March, data released last week showed, but were still up 12.46 per cent, a sharp increase at a time economic growth is hovering close to the lowest level in a decade.

The RBI has responded to a slight cooling in headline inflation in recent months with two 25 basis point cuts this year to bring the benchmark repo rate to 7.50 per cent in a bid to revive growth. But the central bank is concerned that if it lowers rates too much it might undermine the rupee.

India's current account deficit leapt to an all-time high of 6.7 per cent of GDP in the December quarter. A high current account deficit is potentially inflationary because it can lead to a weaker currency and more expensive imports.

Experts say the fall in wholesale and retail inflation rates, coupled with the slowing industrial growth, give room to the central bank for an interest rate cut.

"Inflation below 6 per cent level provides room for the RBI to ease the policy rate next month. We are expecting a 50 basis points policy easing during the first half of the current fiscal year. What would be more important to watch out is transmission to credit markets which has been quite subdued in recent past," Nitesh Ranjan, economist at Union Bank of India, told Reuters. (More expert views)

With inputs from agencies