India’s wholesale price index (WPI)-based inflation remained unchanged at 1.08% in August as inflation for manufactured items fell to 0%. Mint takes a look at the reasons behind this trend and its implications for the Reserve Bank of India’s (RBI) monetary policy.

1) What does the trend in WPI suggest?

Wholesale prices of manufactured products in August were at the same level as a year ago, signalling that producers lacked pricing power. The weakness in the core WPI inflation in August was broad-based, with 15 sub-sectors posting a sequential easing in inflation and nine categories recording negative inflation or disinflation. The depressed demand conditions visible in the economy, both in consumer durables and consumer non-durables, mean producers cannot raise prices and may have to offer discounts. Automakers are offering heavy discounts ahead of the festive season to break the trend of falling sales.

Graphic: Santosh Sharma/Mint
Graphic: Santosh Sharma/Mint


2) Why are the two inflations diverging?

Latest data shows that WPI- and CPI-based inflations are digressing further from each other. This is mostly because they are two sets of indicators with varied compositions. Manufactured items have the highest weight of 64.23% in WPI, while fuel and primary articles have 13.15% and 22.62% weight, respectively. Food and beverages have the highest weight of 54.18% in CPI, while services sectors such as health, education and amusement have a combined weight of 27.26%. In August, retail inflation remained below RBI’s mid-term target of 4% for the 13th consecutive month at 3.21%, while food inflation quickened to 2.99%.

In August, retail inflation remained below RBI’s mid-term target of 4% for the 13th consecutive month at 3.21%, while food inflation quickened to 2.99%
In August, retail inflation remained below RBI’s mid-term target of 4% for the 13th consecutive month at 3.21%, while food inflation quickened to 2.99% (Graphic: Paras Jain/Mint)

3) How seriously does RBI take WPI-based inflation?

RBI has been focusing only on CPI-based inflation after a 2015 monetary framework pact with the Centre. As CPI often mimics WPI trends, RBI may feel better on the retail inflation front.

4) What could change the trajectory of WPI?

The drone attacks on Saudi Arabia’s oil infrastructure, which hit 5-6% of global oil supplies, have set crude prices soaring. The extent to which the rise in global crude prices is sustained and its knock-on impact on the rupee-dollar exchange rate would impact the trajectory of WPI-based inflation. The late surge in monsoon rain narrowed the gap in kharif sowing to 0.6% as on 6 September. However, flooding in some parts of the country has led to a continued rise in the prices of vegetables such as onions.

5) Is RBI likely to go for another rate cut?

With private final consumption expenditure growth declining to 3.1% in the June quarter, the slowest in 18 quarters, the pressure will be on RBI to cut policy rates for the fifth consecutive time in October to support growth. The central bank may further pare its growth projection for the current fiscal, given the lower-than-expected June quarter GDP growth at 5%. RBI has projected India’s GDP growth for the current fiscal at 6.9%, in the range of 5.8-6.6% for the first half of 2019-20 and 7.3-7.5% for the second half.

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