Inflation rate declines to single digit in July

Inflation rate declines to single digit in July

New Delhi: Headline inflation decelerated more than expected, a month before the mid-quarter monetary policy review by the central bank, which has been raising interest rates to rein in prices.

Loading video...

Inflation rate based on the Wholesale Price Index (WPI) in July eased to 9.97% from 10.55% a month ago, driven by a slowing in the rise of prices of manufactured items and food, the government said on Monday. A poll by Bloomberg had estimated inflation at 10.4%.

“We are not out of the range where inflation is not a problem, but it is now moving in the right direction," Planning Commission deputy chairman Montek Singh Ahluwalia told reporters.

He expects inflation to drop to 6% by December, helped by good rains. “The monsoon as a whole, except in some parts of the country, has been very good," he said. “We don’t see a supply side problem in agricultural commodities."

Also See Easing Up (PDF)

The Reserve Bank of India (RBI), which has estimated that inflation will be 6% by the end of the fiscal, will hold its mid-quarter review on 16 September.

Prime Minister Manmohan Singh, in his independence day speech on 15 August, said the government is taking all possible steps to bring down inflation.

Also Read

The bird is still in the bush

The downward surprise has come from the manufacturing side, said Deepali Bhargava, economist with ING Vysya Bank. “But going by the huge revision in April and in May, the revised number for July, too, is likely to be revised higher to at least 10.5% year-on-year," Bhargava said.

Data released by the department of industrial policy and promotion (DIPP) showed the provisional data for May was revised from 10.16% to 11.14%.

Taimur Baig and Kaushik Das of Deutsche Bank AG said in a research note they expect manufactured goods prices to rise as the June-July fuel price increases feed through the economy. “There are also additional upside risks to fuel prices if the government follows through with its goal to liberalize diesel prices and further petrol price adjustments are seen," they added.

Asked about the probable stance RBI may take now, Ahulwalia said: “If the situation changes, they should certainly consider what the position is."

RBI deputy governor Subir Gokarn said recently that the bank has taken adequate measures to manage inflation and its effects will be visible in the coming months with a lag.

Bhargava said RBI is unlikely to ease its stance on inflation in the forthcoming monetary policy review as the current moderation is only tentative. “WPI inflation numbers in the next quarter (Aug-Oct) are expected to be over 9%. We expect WPI inflation to average 7.8% in the remaining part of the year taking the year average to 8.8%," she said.

“Real interest rates in India are widely negative, and hence RBI will continue to raise interest rates steadily in its policy meetings," Baig and Das said. “We are looking at three 25 basis points rate hikes in this calendar year." One basis point is one-hundredth of a percentage point.

Bloomberg, PTI and Reuters contributed to this story.