New Delhi: Inflation based on the Wholesale Price Index (WPI) eased to a five-year low in October which, coming on the back of other positive data released this week, will put additional pressure on the Reserve Bank of India (RBI) to reduce borrowing costs to support a nascent economic recovery.
Wholesale price inflation moderated to 1.77% in October from 2.38% in September. The decline for a fifth consecutive month was mainly on account of falling vegetable and fuel prices.
Fuel prices have eased over the past few months on account of softer global oil prices, with the international crude oil price in the Indian basket falling below $80 per barrel.
On Wednesday, data released by the government had shown that while Consumer Price Index (CPI)-based inflation had eased further to 5.52% in October from 6.46% in September, factory output was showing signs of recovery, expanding 2.5% in October after anaemic growth in the preceding two months.
With concerns over prices easing, the government has been prodding the central bank to cut interest rates to support economic recovery. Finance minister Arun Jaitley said recently that high interest rates were one of the key downside risks for the Indian economy and pushed for a rate cut by RBI.
The economy grew 5.7% in the quarter ended 30 June, the fastest pace in two-and-a-half years, after slumping below 5% levels in each of the previous two years. The government expects growth to rebound to 5.8% this fiscal year.
Economists remain divided over the possibility of the central bank cutting interest rates in its 2 December monetary policy review, given expectations that inflation will rebound in the next calendar year as the impact of the base effect wears off.
“The lowering of inflation for the fifth consecutive month is indeed a positive sign for the economy. However, these numbers should be viewed with caution. The base effect is pronounced and will be so in November too. Also, the ministry of agriculture has forecasted lower kharif output for cereals, pulses and oilseeds; this could result in some upward bias on inflation in the coming months,” said Madan Sabnavis, chief economist at CARE Ratings.
“There could be a strong case for the RBI to consider a rate cut given the continuous decline in the CPI and WPI inflation numbers in the last few months. However, the RBI may defer the decision for the next review, depending on how the inflation moves in the coming months,” he said.
RBI is aiming to contain retail inflation at 8% by January 2015 and 6% by January 2016.
In October, while food inflation measured by WPI rose 2.7%, fuel inflation was up 0.43%, data released by the commerce ministry showed. WPI inflation for August was revised upwards to 3.85% from 3.74%.
“A slower pace of inflation was seen across food, fuel and manufactured goods, suggesting that a broad disinflationary trend is clearly underway. Lower commodity prices and normalization of vegetable prices did help incrementally. But, the fact that core WPI inflation eased to 2.5% from 2.8% suggests that demand conditions remain soft,” Citi India economist Rohini Malkani said in a research note.