New Delhi: Inflation held near a 27-year low, suggesting the central bank’s six interest rate cuts since October may help spur growth without rekindling inflation.
Wholesale prices rose 0.26% in the week to 11 April from a year earlier after gaining 0.18% the previous week, the commerce ministry said in New Delhi on Thursday. That was more than the 0.10% increase expected by 21 economists in a Bloomberg survey.
The Wholesale Price Index may turn negative in the next few months though that shouldn’t be interpreted as deflation as consumer price gains continue to run at near double-digits, according to central bank governor D. Subbarao. The Reserve Bank of India (RBI) this week cut borrowing costs to a record low to bolster an economy growing at the weakest pace since 2003.
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“The sharp deceleration of wholesale price growth is a clear indication that inflationary pressures have evaporated and the Reserve Bank should now focus more on reviving economic growth,” said Sherman Chan, an economist at Moody’s Economy.com in Sydney. “I expect the central bank to maintain a loosening bias in the coming months.”
Inflation in India has eased since surging in August to a 16-year high of 12.91% amid soaring commodity costs.
The average annual inflation rate was 0% in the fiscal year 1978-79 and prices declined by 1.1% in 1975-76, according to RBI’s older data that doesn’t provide a weekly breakdown.
Subbarao on 21 April reduced the central bank’s reverse repurchase rate (or the rate at which it borrows from banks) and the repurchase rate (the rate at which it lends to banks, which effectively becomes the accepted base short-term lending rate) by a quarter point each to 3.25% and 4.75%, dropping them to the lowest since they were introduced in 2000.
RBI in its annual policy announcement on 21 April said any decline in wholesale prices may not persist beyond the middle of the fiscal year that started 1 April and that inflation may reach 4% by March.
The inflation rate rose in the week to 11 April as the manufactured price index, accounting for 63.75% of the inflation basket, increased 0.9% from a year earlier after gaining 0.75% in the previous week.
Prices of vegetables, fruits, cereals, sugar, salt and cooking oil rose in the week, Thursday’s report showed.
India’s $1.2 trillion (Rs60 trillion) economy is forecast by RBI to expand by 6% in the fiscal year, the slowest pace since 2003.
Graphics by Paras Jain / Mint