RBI interest rate cut: 5 things to know plus, outlook

Will RBI effect an interest rate cut? Here are 5 must-know factors that show way forward.

WPI inflation decelerated to a 5-month low of 6.2% in Dec?13, compared to 7.5% in Nov?13. The inflation number for Oct?13 has been revised 24 bps upwards from 7.0% to 7.24%.

However, tracked on year-on-year (y-o-y) basis, inflation at wholesale level in primary article and fuel and power continue to grow in excess of 10%.

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The manufactured sector inflation has shown definite signs of cooling as reflected in y-o-y inflation and also the buildup figures from Mar?13. On the retail front, CPI (Combined) inflation also declined to 9.87% (Rural: 10.49% & Urban: 9.11%) in Dec?13 from a high of 11.16% in Nov?13.

Based on the latest updates, it appears that WPI inflation may settle around 6% and CPI inflation around 9% by Feb?14.

Sub-9% CPI inflation is a possibility if WPI inflation contracts at a faster pace and as we draw closer to election season whose announcement is likely in Feb?14. An overall assessment therefore suggests that a rate cut is likely only in the next financial year.?

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By Dr. Soumya Kanti Ghosh, Chief Economic Adviser, Economic Research Department, State Bank of India.