A high rate of inflation has often been the stumbling block for growth. With GDP growth falling to a 9 year low of 5.3% in last quarter, growth concerns are quite tangible. And high inflation was precisely the reason why the central bank did not go in for monetary easing.
And then there was the much awaited drop in the oil prices that reflected in wholesale price inflation (WPI) level for the month of May. Coming at 7.25%, a level much lower than expected, the WPI data is a positive surprise. It has set expectations for a dovish stance in the upcoming monetary policy review due in two weeks. The manufacturing inflation seems to have stabilized at 5%, well within central bank's comfort zone. Despite a fall in rupee, stable inflation levels for non food manufacturing (core inflation) inflation suggest global easing of prices.
However, whether the lower inflation figure will give more cushion to cut interest rates is not clear. Especially because statistics is never sacrosanct. In fact, the Government has recently revised April inflation data upwards from previously announced 7.2% to 7.5%. The current data itself seems to have conveniently missed the increase in power tariffs. We can't overlook the fact that food inflation remains high and monsoons don't exactly seem to be in a mood to oblige. Also, an impending increase in diesel prices could make things worse.
Nonetheless, the data offers a window of opportunity to balance inflationary pressures with the growth target. However, even if a rate cut follows, it will be no guarantee for a stable economy unless the Government's fiscal policies are in tune with the monetary policies of central bank.