New Delhi: India’s Wholesale Price Index (WPI) remained negative in annual terms in mid-July, but analysts said inflation would soon return and the Reserve Bank of India (RBI) was right to leave interest rates steady at a policy review this week.
WPI fell 1.54% in the 12 months to 18 July, its seventh successive fall, compared with a 1.17% drop in the prior week and a market forecast of a 1.46% fall. Food prices rose 1.2% from the previous week and the government revised up the 23 May inflation reading to 1.34% from 0.48%.
“WPI has been consistently under-estimated. There has been a huge discrepancy between the provisional and actual WPI numbers,” said N.R. Bhanumurthy, an economist with the National Institute of Public Finance and Policy. “Inflation expectations are high and there is no scope for more interest rate cuts.”
At a policy review on Tuesday, RBI revised its inflation estimate up to 5% at the end of March 2010 from 4%, and left key policy rates unchanged to help an economic recovery.
WPI has been rising on a weekly basis since March as price pressures slowly build up. The Consumer Price Index, which has a greater weighting on food items, rose 8.63% in May from a year earlier. “Impact of delayed monsoons on food prices, some recovery in prices of manufactured goods in the second half as well as the base effect will likely take inflation much higher towards end of last quarter,” said Shubhada Rao, chief economist of YES Bank Ltd. “We expect WPI inflation to exceed 5.5% by end March,” she said.
RBI has cut its lending rate by 4.25 percentage points between October and April and the government slashed duties and increased public spending to stimulate the economy hit by the global slump and falling domestic demand.
The government has forecast its fiscal deficit will widen to to 6.8% of gross domestic product in 2009-10 and has planned record gross market borrowing of Rs4.51 trillion. Nearly two-thirds of the borrowing has been front-loaded for the April-September, taking advantage of the extra cash RBI has maintained in the banking system to ensure credit keeps flowing.