Home / Politics / Policy /  Wholesale inflation falls to 5.05% in January

New Delhi: In a fresh sign that inflation may have peaked for now, the Wholesale Price Index (WPI)-based inflation eased to an eight-month low of 5.05% in January, raising industry hopes that the central bank may soon revisit its tight monetary policy stance and turn its sights to reviving economic growth.

The decline, from 6.16% in December, will bring relief to policymakers battling high inflation and slow economic growth, and, of course, the incumbent Congress-led United Progressive Alliance ahead of a general election due by April-May.

Inflation measured by WPI slowed more than analysts had expected. A Bloomberg poll had forecast wholesale price-based inflation at 5.6% in January.

In a separate development, crop production is expected to clock a 2% increase this year to touch 263.3 million tonnes (mt) during the 2013-14 crop year (July 2013-June 2014) from 257.13 mt last year, the ministry of agriculture said, signalling a further dampener on inflationary pressures.

Data released by the commerce ministry on Friday showed that WPI inflation eased for the second straight month mainly due to falling food prices, especially vegetables. Food inflation eased to 8.8% from 13.68% in the preceding month. Fuel prices also eased marginally, the data showed.

With retail inflation also easing, the new data will likely provide policy space for the Reserve Bank of India (RBI), though analysts expect it to maintain a status quo on rates in the next monetary policy review in April. In January, RBI raised its key repo rate, at which it lends overnight funds to commercial banks, by a quarter of a percentage point to 8%.

Asia’s third biggest economy has been struggling to contain inflation and restore growth momentum. Economic growth eased to 4.5% in the last fiscal year, the slowest pace in a decade, and is expected to stay below 5% in the year ending 31 March. Fresh data released this week showed manufacturing output contracted for a third month running, with the Index of Industrial Production falling 0.6% in December, renewing concerns about growth.

Data released on Wednesday showed that retail inflation also eased to a two-year low of 8.8% in January, from 9.87% the preceding month. RBI is now aiming to bring down retail inflation to 8% by January 2015 and 6% by January 2016, according to the recommendations of a panel headed by deputy governor Urjit Patel. Persistently high inflation has caused the central bank to keep borrowing costs high.

Economic affairs secretary Arvind Mayaram said he hoped there will be a real push to boost growth with the rate of inflation falling. Industry is also clamouring for RBI to adopt a more accommodative stance, given the inflation numbers.

“The declining trajectory of inflation should spur RBI to revisit its monetary policy stance and cut its policy rates to rejuvenate growth in the industry, which has been hit by high interest costs and flagg

Experts said it is too early to say that inflation is on the downward trend as the current fall is mainly due to falling vegetable prices even as core inflation is on the rise. Core inflation—non-food, non-fuel inflation—increased marginally to 3.04% in January from 2.75% in December.

“...the sharp slowing should be taken with a pinch of salt because we have earlier seen such sharp deceleration followed by prices speeding up," said D.K. Joshi, chief economist at rating company Crisil Ltd.

The central bank, in its third quarter monetary policy review, had said it will have more room to be accommodative if inflation eases at a faster pace than expected.

Manufactured product price inflation still reflects that some pricing power is left with manufacturing companies because of the rupee’s depreciation and rise in input prices, said Rupa Rege Nitsure, Bank of Baroda’s chief economist.

“It’s too early to draw comfort from this number. RBI will adopt a wait-and-watch approach as of now because going by just one set of data is not enough and the next set of data on inflation and industrial production will be critical to establish a trend," she said.

Onion price inflation eased in January to 6.6% from 39.6% in December and 201% in November. The rate of price inflation for manufactured goods, which has the highest weight in WPI, remained nearly flat, rising only slightly to 2.74% in January from 2.6% in December.

Meanwhile, the agriculture ministry’s projection of a 2% rise in crop production came on the back of a good monsoon in 2013. India received 6% higher rainfall than normal in the 2013 monsoon season that ended on 30 September, according to the India Meteorological Department. Monsoon rains are vital for 55% of the country’s farmlands that lack irrigation facilities.

The projected growth in agricultural production is expected to help keep food prices in check.

“These production numbers are reflecting what we all expected, given the good monsoons. The projection of a good harvest and the decline in food inflation are in line with what was expected. However, while production numbers for kharif crops are likely to be accurate going forward, those for rabi could change since the rabi crop is still standing," said Abhijit Sen, member, Planning Commission.

The two major staples—rice and wheat—are expected to register record production, said the ministry of agriculture in a press statement on Friday, releasing its second advance estimates data.

Rice production is expected at 106.19 mt, nearly 1 mt higher than last year’s 105.24 mt. Wheat, the main winter crop, is expected to reach 95.6 mt, more than 2 mt more than that produced in 2012-13 (93.51 mt). Production of pulses is expected to grow by 1.4 mt to 19.77 mt.

The production of commercial crops such as sugar cane, cotton and oilseeds is also projected to improve over last year. Nine major oilseeds put together would clock 32.98 mt against 30.94 mt, cotton output at 35.6 million bales against 34.22 million bales, and sugar cane at 345.92 mt against 341.20 mt last year.

Reuters contributed to this story.

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