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Business News/ Politics / Policy/  Wholesale inflation falls sharply to -4.05% in July
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Wholesale inflation falls sharply to -4.05% in July

Fall driven by a drop in prices of food and manufactured items, raises clamour for a rate cut by RBI

India’s retail inflation has cooled to a record low of 3.78% in July, adding pressure on the RBI chief Raghuram Rajan to cut interest rates after China devalued its currency this week. Photo: Bloomberg Premium
India’s retail inflation has cooled to a record low of 3.78% in July, adding pressure on the RBI chief Raghuram Rajan to cut interest rates after China devalued its currency this week. Photo: Bloomberg

New Delhi: After retail inflation fell to a record low in July, wholesale price inflation contracted for the ninth month in a row on the back of lower food and commodity prices, raising the clamour for a rate cut by the central bank.

Wholesale Price Index (WPI)-based inflation rate was minus 4.05% in July against minus 2.4% a month ago, driven by 1.16% drop in food prices and 1.47% fall in prices of manufactured items. Retail inflation slowed sharply to 3.78% in July from 5.4% in June due to a higher base last year, data showed on Wednesday.

The WPI reading suggests that prices continue to be influenced by a deflationary trend in global commodity cycle along with the government’s continued efforts at managing the food economy and persistence of softer demand conditions, said Garima Kapoor, economist at Yes Bank Ltd.

“The continued negative print on wholesale inflation supports our view that the upside risks to CPI (Consumer Price Index) inflation remain contained, cementing our view that Jan-16 CPI inflation is likely to undershoot RBI’s 6% target by 40-50 bps (basis points) creating room for additional 25 bps rate cut," she added. One basis point is one-hundredth of a percentage point.

However, what could delay a possible earlier-than-expected rate cut is that RBI may have already factored in the dip in inflation rates. In its monetary policy statement last week, RBI said: “Large base effects, which the Reserve Bank will look through, are expected to pull down headline inflation in July and August. From September, favourable base effects wane."

Some economists have suggested that RBI will wait for the outcome of the US Federal Reserve’s September meeting before deciding on its course of action. The Fed may raise its key rate next month for the first time since 2006 or at least indicate a time frame to do so.

The Fed meets on 16-17 September and RBI’s next monetary policy review is due on 29 September.

Although the WPI data showed an unexpected decline and dropped to previously unknown levels, WPI is not a major consideration for RBI for deciding monetary policy, said Richa Gupta, senior director at consultancy firm Deloitte in India.

“The pressures for a rate cut are also building up on the strength of global factors like the yuan devaluation and the possibility of Fed continuing to maintain status quo in its September announcement," she added.

The other big concern that RBI has been voicing is that while till date repo has been cut by 75 bps, there has been little corresponding decline in the lending rates by the bank.

“Therefore, RBI is also looking for signals for greater monetary transmission. Some such signals can be expected as the government moves into recapitalize the PSU (public sector unit) banks," Gupta said. “All in all, while the demand for a decrease in repo may increase but we think that policy measures that allow headroom to banks to take control of NPAs (non-performing assets) and pass on rate cuts to industries and consumers will be of greater significance."

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Published: 14 Aug 2015, 12:45 PM IST
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