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Business News/ Politics / Policy/  Is the inflation tide turning?
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Is the inflation tide turning?

WPI inflation moderates significantly to 6.16% in December from its 14-month high of 7.52% a month ago

Onion prices increased at a rate of 39.56% in December compared with a 190% rise a month ago, while vegetable prices gained 57.33% against 95.25% in November. Photo: Mint Premium
Onion prices increased at a rate of 39.56% in December compared with a 190% rise a month ago, while vegetable prices gained 57.33% against 95.25% in November. Photo: Mint

New Delhi: India’s wholesale price index (WPI)-based inflation moderated significantly to a five-month low at 6.16% in December from its 14-month high of 7.52% a month ago, continuing the thread of good macroeconomic news that has come the country’s way in recent months.

Together with the deceleration in retail inflation to a three-month low, reported on Monday, this may have created some precious policy space for the Reserve Bank of India (RBI) to hold interest rates at their current levels in its money policy review on 28 January.

Stirring up the mood further, especially for the rupee, finance minister P. Chidambaram announced on Wednesday that the current account deficit would be $50 billion for the current fiscal as compared to the initial projection of $70 billion.

And rounding off Wednesday’s good news, the World Bank said it expects India to grow at 6.2% in 2014-15, lower than the initially expected 6.5%, but a sharp increase over the 4.8% at which the economy is expected to expand in 2013-14.

On cue, the 30-share bellwether BSE Sensex ended up 1.22%, or 256.61 points, at 21,289.49 points, the highest since 9 December. The National Stock Exchange’s broader 50-share Nifty ended up 1.27%, or 79.05 points, at 6,320.90 points.

The yield on India’s 10-year benchmark bond fell to 8.617% intra-day, 10 basis points down from the previous close of 8.71%, before ending the day at 8.639% as inflation moderated more than expected in December and RBI postponed a 17 January auction of 15,000 crore worth of bonds to contain fiscal deficit at 4.8% of gross domestic product. A fall in bond yields means a rise in prices.

A Reuters poll of economists had expected a higher inflation reading of 7%.

The key to decelerating inflation, as it was in the case of retail inflation, was lower onion prices. Onion prices increased at a rate of 39.56% in December (over the previous December) compared with a 190% rise a month ago, while vegetable prices gained 57.33% against 95.25% in November. However, prices of cereals and meat rose by double digits, imparting some stickiness to food inflation.

Retail inflation slowed to a three-month low of 9.87% in December, from 11.16% in November.

Still, there have been discordant notes in this happy aria.

India’s factory output contracted for a second straight month in November, by 2.1%, data released on Friday showed, because of a sharp decline in production of consumer durables, signalling that economic recovery may take longer than previously expected.

And what could worry new RBI chief Raghuram Rajan is a pick-up in core inflation, which inched up to around 2.8% last month from 2.66% in November, though it was still within RBI’s comfort range of 3%. The October WPI number was also revised upwards to 7.24% from 7% by the industry department which releases the data.

Aditi Nayar, senior economist at ICRA Ltd, said the upward revision in core inflation by 30-40 basis points in each of the months between August and October suggests that there may be a similar correction in November and December. One basis point is one-hundredth of a percentage point.

“Nevertheless, the weakness in consumer demand and relative exchange rate stability suggest that core inflation is unlikely to accelerate sharply," she added.

Core inflation excludes products such as fruits and vegetables, milk and edible oils, largely those whose prices could see significant variation in a short period of time.

Abheek Barua, chief economist at HDFC Bank Ltd, said the systemic large bias in upward data revision is a cause of concern and has to be taken into account by RBI. Barua said market hopes of a rate cut seem to be a little optimistic, given that the rupee may enter a volatile phase starting March with rising political uncertainty.

“Financing even a $40-50 billion current account deficit in an election year may not be an easy task," he added. General elections in India are due in April and May.

The rupee ended at 61.55 to the dollar on Wednesday, down 0.05% from its previous close. In intra-day trade, the local unit rose to 61.43, or by 0.15%. Thus far in January, the rupee has gained 0.41%.

Upasna Bhardwaj, economist at ING Vysya Bank Ltd, wrote in a research note on Wednesday that she expects price pressure to remain elevated in the second half of 2014 and cannot rule out another 25 basis point increase in the repo rate in the months ahead.

“For most of last year, sharp weakness in rupee has pushed up the cost of raw materials but lack of pricing power has led to limited pass-through to customers. We believe that some pass-through of earlier-borne higher input costs would begin to reflect in the index going forward," she added.

The repo rate is the rate at which RBI lends to commercial banks and, therefore, the rate at which it infuses liquidity into the system.

In its mid-quarter policy review on 18 December, RBI kept its policy rate unchanged at 7.75%, expecting a drop in the inflation rate because of an expected fall in food prices. RBI had then cautioned that if the expected softening of food inflation did not materialize, it would act accordingly.

Since he took charge in September, RBI governor Rajan has raised the key policy rate twice, from 7.25% to 7.75%, even as he has emphasized that the central bank’s primary focus will be on controlling inflation.

Prime minister Manmohan Singh, addressing his third press conference in 10 years, said earlier this month that the government had not been as successful in controlling persistent inflation as it would have wished to be.

“This is primarily because food inflation has increased," he said. Concerned by the high inflation and its impact on the upcoming general elections, the Congress last month asked the 12 state governments run by the party to do away with middlemen in the sale of fruits and vegetables by amending the Agricultural Produce Market Committee Act.

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Updated: 16 Jan 2014, 12:27 AM IST
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