New Delhi: India’s wholesale price index fell in early June on an annual basis for the first time in at least three decades, but analysts said this did not signal a weakening economy and would not prod the central bank to cut rates further.
The Reserve Bank of India (RBI) and analysts had forecast negative trends in the price index mainly for statistical reasons, rather than calling it deflation that follows a sharp contraction in demand.
The widely watched wholesale price index fell 1.61% in the 12 months to 6 June, the government said, sharply below previous week’s rise of 0.13%. The drop was bigger than 1.52% median forecast by analysts.
“This is due to the high statistical base, but going forward inflationary risks are already in sight,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
The price index has been rising on a week-on-week basis since March reflecting a pickup in demand and ensuing price pressures in Asia’s third largest economy.
“The inflation momentum has been picking up and a continued rise in commodity prices will exert upward pressure on input costs,” said Sonal Varma, an economist with Nomura.
India’s factory output unexpectedly rose in April, reviving hopes the economy turned a corner and sparked speculation the central bank may not cut rates again in near future.
The Indian economy expanded 6.7% in the 2008-09 year ended in March, slower than a scorching 9% in the previous year but faster than many other emerging economies, but policy makers say it could rebound to at least 7% this year.
Analysts said the annual fall in WPI had little implication for monetary policy, and firm consumer price inflation, which stood at 8.7% in April, has kept policy makers cautious.
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“I think monetary policy will gradually start building into the inflationary expectation some time around October essentially because of rising commodity prices,” said Jyotinder Kaur, economist at HDFC Bank.
India’s central bank has cut its lending rate by 4.25 percentage points between October and April, while government has slashed duties and increased public spending to stimulate the economy hit by the global slump and falling domestic demand.
Last week, the finance minister urged banks to lower their interest rates, taking cues from the central bank, and step up loans to industry to help bolster sagging growth.
The coalition led by the Congress party that was re-elected for a second five-year term is due to present its budget on 6 July, which is expected to offer more economic stimulus.
The 5-year bond yield was steady at 6.63% after the release of price index data, higher than Wednesday’s close of 6.61%. The 30-share BSE index extended losses to 0.5% at 0700 GMT after being down 0.1% after the data.
“Inflation pressures are expected to gradually build up towards third and fourth quarter of the current fiscal year,” said Shubhada Rao, chief economist at Yes Bank. “By year-end, we expect (wholesale) inflation to exceed 5.5%.”