Lower inflation gives RBI greater room to cut rates

Lower inflation gives RBI greater room to cut rates

Declining inflation numbers have shown a ray of hope to the Indian economy as lower inflation can encourage the Reserve Bank of India (RBI) to slash key interest rates, which is essential to stimulate investors and boost the economy.

Helped by a considerable decline in prices of onion and potatoes, the wholesale price index (WPI)-based inflation slipped to 4.68 per cent in February this year. It was the lowest level of WPI-based inflation in the past nine months.

While the WPI-based inflation slipped well below the psychological mark of 5 per cent in February, it also matches the central bank's target of 4-5 per cent.

The wholesale inflation was recorded at 7.28 per cent in February last year, and at 5.50 per cent in January this year.

The CPI-based inflation dropped to 8.1 per cent in the month under review. It was the lowest level in the last 25 months. Inflation in rural and urban areas, inflation was recorded at 8.51 per cent and 7.55 per cent, respectively. Prior to February this year, the lowest CPI-based inflation rate was recorded at 7.65 per cent in January 2012.

Commenting on the fresh stats, Miguel Chanco of Singapore-based Capital Economics said that the third largest Asian economy had stared moving in the right direction. But, he cautioned that the economy was still far from healthy.

Falling rates of inflation will give greater room to the RBI to cut key interest rates. The central bank will review its policy on April 1, 2014.

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