India’s annual headline inflation rate declined to an 11-month low of 7.48% in November on the back of a higher base effect and easing food prices. Costlier fuel may disrupt the downward trend.
Bharat Petroleum Corp. Ltd decided to raise petrol prices by Rs2.95 a litre effective Tuesday midnight. Other public sector companies such as Indian Oil Corp. Ltd and Hindustan Petroleum Corp. Ltd are expected to follow suit.
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Still, economists said the price hike may not have a major impact on the declining inflationary trend.
“Unlike diesel, which is used for public transportation, the second round effect of a hike in petrol price is minimal. It will only pinch the urban consumer and will not have a lasting impact on inflation,” said D.K. Joshi, chief economist, Crisil Ltd.
Finance minister Pranab Mukherjee said earlier on Tuesday that he was delighted by the slowdown in inflation. “These numbers take us another step towards our forecast of 6% inflation by March 2011,” he said.
Wholesale price-based inflation stood at 8.58% a month ago in October.
“These inflation figures show that we have done well in terms of our monetary and fiscal policies. It is, however, important for us to stay on the planned path of policy,” Mukherjee added.
Planning Commission deputy chairman Montek Singh Ahluwalia said the decline in inflation rate “vindicates the government’s proposition that we are not facing accelerating inflation or inflation that is out of control.”
The Reserve Bank of India (RBI) has raised policy rates six times since April this year to tame soaring inflation, which remained above the double-digit mark till July. In its latest policy review in November, RBI increased repo and reverse repo rate by 25 basis points. The first is the rate at which RBI lends to banks and the second is that at which the central bank absorbs surplus liquidity from them.
One basis point is one-hundredth of a percentage point.
RBI, which will carry out a mid-quarter review of its monetary policy on 16 December, is expected to leave the policy rates unchanged.
“Perhaps the declining trend in inflation might tilt it in favour of holding on to the present situation,” Prime Minister’s economic advisory council chairman C. Rangarajan told PTI.
Economists Rohini Malkani and Anushka Shah of Citigroup India said in a report that RBI is expected to pause on 16 December given growth and inflation dynamics. “We maintain our view of an additional 75 basis points of rate hikes through the course of 2011. This would take the repo and reverse repo rates up to 7% and 6%, respectively.”
The same macro report by Citigroup India found month-on-month seasonally adjusted WPI (Wholesale Price Index) inflation was up 0.8% in November as against 0.7% a month ago. While manufactured food products rose 0.3%, non-food manufactured products continued to edge higher at 5.3%, it said.
According to data released by the industry department, food inflation declined drastically to 9.41% in November from 16.68% a month ago. Price indices for fuel group and manufactured items also declined, even though the prices of the non-food primary articles segment went up.
Malkani and Shah hold that prices in 2011 are likely to remain sticky on account of higher crude prices, which, besides impacting the fuel index, also has a knock-on impact on manufactured non-food products.
Crisil’s Joshi said commodity prices may rise gradually unlike the surge seen in 2007. “Though statistically inflation will come down to 6% by March, one has to constantly monitor it because the downside risks remain,” he added.
PTI contributed to this story.