Inflation 3.92% Vs 4.39%

As expected Inflation came down to below 4% from 4.39%. Again there is drop of 47 basis points from 4.39% to 3.92, which is very significant.

If you see the dropping pattern of Inflation, it has been bigger drop only (from 40 -60 basis points a week) unlike just a slowdown. And if it continues like this way, then there is definitely DEFLATION in the months of May or June. In addition to pace of drop in the inflation, these months(June, July & August) are also facing high base due to high inflation in last year.

Not only this, there is slow down in the consuming factor due to various reasons like Liquidity unavailability, massive layoffs through out the industry, slowdown in the economic activities. This leads to low income or uncertainty of income in future, which again leads to more saving rather than consuming. And also there is possibility foregoing the consumption on the hope that prices will come down further which is like spiraling effect.

So there is possibility of monetary ease from RBI in terms of Repo & Reverse Repo for 50 - 100 basis points. And in this case RBI should not look for call money rate, since if you look at the call money rates pattern it goes out of so called corridor of repo and reverse repo only in crisis time that is when Lehman Brothers bankrupted. I think call money rate is not a measure to credit flow in longer terms, rather its very short term in nature. And yesterday RBI governor Mr. Subbarao also mentioned that there is room for the rates to reduce.