Last month, the Reserve Bank of India (RBI) cut borrowing costs by more than expected — by 50 basis points — after nearly three years, thereby reducing the benchmark borrowing rate to 8.0%. Because of elevated inflation, further cuts are unlikely as this would increase the money supply and inflate prices above prudential levels. Inflation remains a major risk to India’s economic stability. The wholesale price index rose by 7.23% y-o-y in April, picking up about 6.7% a month earlier.
On 18 May, the government reported that the consumer price index (CPI) had risen by 10.4% y-o-y in April, following an increase of 9.4% in March. A weak Indian rupee, coupled with rising costs of crude oil imports, have exerted upward pressures on overall prices. The rupee depreciated by 2% against the US dollar in May, reaching a record low. With the recent strength of the dollar, further depreciation of the rupee is expected. Industrial production contracted by 13.5% on an annualized basis in March, recording its first decline since October. Average industrial growth in 2011-2012 stood at a feeble 2.8%. Manufacturing output contracted by 4.4% in March, while mining production declined by 1.3%. However, electricity production rose by 2.7% (EIU Country Report, June 2012).