New Delhi: India’s wholesale inflation rate slowed to an eight-month low of 7.45% in October mainly because of the declining prices of food and manufactured products.
There will now be increased pressure on the central bank to cut its policy rates to support growth, which has been tepid, as seen in the consistent fall in industrial production and merchandize exports.
Growth in Asia’s third largest economy hit a nine-year low of 5.3% in the quarter ended March before rising slightly to 5.5% in the following quarter. But high inflation has forced the Reserve Bank of India (RBI) to keep interest rates up, crimping investment and consumer spending.
India’s Wholesale Price Index, or WPI, was 7.81% in September, above RBI’s comfort level of 5%.India remains an outlier so far as inflationary pressure is concerned, as lacklustre growth and high unemployment have eased price rise in most advanced and emerging economies.
RBI, in its mid-year monetary policy review released in October, warned that inflation remains sticky and warranted more caution in monetary policy for some more time. It hoped inflation will start moderating from the March quarter, as the late revival of the monsoon could have a salutary impact on food inflation.
The so-called core inflation, or price rise in non-food manufacturing products, which is closely tracked by RBI, declined to 5.2% in October from 5.6% a month ago.
The industry department, which releases the data, however, revised the August inflation data to 8.01% from the provisional figure of 7.55%.
Although the inflation data for October were considerably below consensus expectations, the revision in inflation rates for all major sub-indices for August was worrying, said Aditi Nayar, senior economist at credit rating agency Icra Ltd.
The central bank in its monetary policy indicated a rate cut in its January policy review. “If macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond to growth concerns,” it said.
It was too early to become comfortable with the inflation rate as it was likely to rise again in November, said D.K. Joshi, chief economist at ratings firm Crisil Ltd.
Despite the drop in wholesale inflation, retail prices have been rising. Retail inflation based on the Consumer Price Index (CPI) accelerated to 9.75% in October from 9.73% in September, data released by the statistics department showed on Monday.
Joshi said it will be difficult for RBI to overlook the divergent trend in retail and wholesale price inflation as rising retail prices highlighted the underlying demand pressure in the economy.
RBI said that from the supply side, high inflation in India reflected the lagged adjustments in the prices of fuel as well as the role of structural factors.
“From the demand side, growth of real wages in excess of increase in productivity and a high fiscal deficit have added to inflationary pressures. A sustained moderation in inﬂation, therefore, can be achieved through policy initiatives to address the structural constraints,” it said in its policy review.
Finance minister P. Chidambaram revised the fiscal deficit target to 5.3% from 5.1% while releasing a fiscal consolidation road map on 29 October.
But lower accrual than expected from the auction of second generation radio spectrum is likely to make it more difficult to achieve this revised target. Another source of non-tax revenue—sales of stakes in state-run firms—has also failed to make much headway so far this year, although the government has targeted raising Rs.30,000 crore through this process.
Though the cabinet has cleared the divestment of stake in some public enterprises for this fiscal, the government has failed to move ahead with any, barring a public sale of shares of National Buildings Construction Corp. Ltd for just Rs.124.97 crore.