Inflation returns to the happy lows

At last the waiting happy news of reduced inflation data has came. The WPI gives a price rise figure of 5.96% for the month of March. This is the lowest since November 2009. Inflation figures have recorded below 6% for the first time in the last three and a half years. This is the welcome and surprising news for those who are waiting for a turnaround in the economy’s performance. Financial markets have swiftly responded to the inflation data as sensex and the nifty recorded gains and bond prices registered decline in yields.

Now the declining trend in inflation and it coming close to the RBI’s comfort zone of 5% has sound implication for the economy.  In the case if the inflation figures remain at the 5-6% in April, the RBI may signal an interest rate cut by reducing the repo rate. This will support consumption and investment activity which are depressed for the last three years because of high interest rate and inflation fears. Hence, the overall economic activity may get momentum once the RBI follows the reduced inflation with interest rate cut.

Always there is strong bond between interest rate and stock prices. A softened interest rate is the right platform for stock prices to rise. Hence, a reduced interest rate will lead to increased liquidity into the equity market. Usually, a revival in the equity market is the beginning of the boom phase in the economy by stimulating investment activities. From this entire angle, the present inflation data is rare happy news for the economy which we were waiting for during the last three years.