In November, the Wholesale Price Index (WPI) -based inflation stood at zero per cent, compared with 1.77 per cent the previous month, primarily on account of a sharp fall in global commodity prices. This prompted industry to call for a rate cut by the Reserve Bank of India to spur sagging economic activity, as demonstrated by weak industrial production data on Friday. Economists, however, remain divided on the issue.
A deceleration in inflation was witnessed across broad segments — primary products, food, fuel and manufactured goods. Primary products (non-processed items) and fuel, in fact, saw a price decline on a year-on-year basis, official data for November revealed on Monday. The zero per cent wholesale inflation was the lowest since July 2009, a month that had seen disinflation.
The widely-tracked food inflation declined to 0.63 per cent, a near-zero level, compared with 2.7 per cent in October. There was an easing in prices across all major food categories — cereals, rice, wheat and vegetables. For vegetables, onions in particular, there was a high base effect. Prices of a few other items, such as fruit, milk and potatoes, continued to be high in November, even as the rate of price increase declined from the previous month.
Economists, however, say the risks to inflation have not fully subsided. According to Icra Senior Economist Aditi Nayar, “the month-on-month rise in prices of protein-rich foods like pulses and non-vegetarian items might continue in the near term, and remain the chief risk for the food inflation trajectory.”
Additionally, she said WPI-based food inflation could rise sharply on a year-on-year basis in the coming months as the effect of low base waned.
A research note from CARE said, “the only risk factor is a possible increase in agricultural product prices in the next two months, as kharif crop is estimated to be lower this year. However, this has so far not manifested in any significant increase in prices.”
Prices might rise also because of a low level of sowing for the rabi (winter-spring) crops so far this year compared with the corresponding period last year.
Within primary items, non-food products like minerals, fibres and oil seeds saw a sharp reduction in prices. The category saw a disinflation of 3.6 per cent in November, against 1.4 the previous month.
In recent times, while crude oil prices have seen a sharp reduction, other commodities have also seen a softening trend.
Prices of fuel and power, which have a weight of 14.91 per cent on WPI, declined 4.91 per cent in the month. This meant a disinflation in this category as well. While petrol turned cheaper by 9.91 per cent, diesel turned 2.97 per cent less expensive.
Inflation manufactured products, which have a weight of 64.97 per cent on the index, declined to 2.04 per cent from 2.43 per cent in October. Among broad categories, this was the only one that saw an inflation in November. Here too, rise in prices of food items was very little, 1.17 per cent, compared with 2.11 per cent in October.
Economists argued the recent moderation in inflation might be transitory is nature. Five of the 11 sub-sectors of non-food manufactured products (which together account for 38 per cent of the index) saw month-on-month declines in index levels.
According to Nayar, “the month-on-month fall in textiles, rubber & rubber products, chemicals & chemical products and basic metals, alloys, etc, could be attributed to falling global prices of cotton, rubber, crude oil and precious metals. However, the fall in transport equipment & parts is more reflective of domestic demand situation.”
Data released last week showed Consumer Price Index (CPI) -based inflation in November fell to 4.38 per cent, its lowest level yet.
With both WPI- and CPI-based inflation rates trending downwards, there is growing pressure on the Reserve Bank of India to consider lowering its policy rate. The central bank has so far resisted from doing this, saying the easing in inflation is transitory in nature. But a sharp fall in India’s industrial production, as revealed by the Index of Industrial Production (IIP) estimates for November, could exert further pressure on RBI to cut interest rate earlier than expected.
Sidharth Birla, president of industry body Ficci, said a fairly balanced medium-term outlook for inflation indicated in the previous monetary policy announcement gives sufficient room for an accommodative stance.
But economists had differing view. YES Bank Chief Economist Shubhada Rao said: “From a monetary policy perspective, the recent decline in commodity prices, amid continued easing in structural drivers of retail inflation, is likely to further alleviate RBI’s concerns on inflation. We continue to expect monetary policy to turn accommodative from February next year. There could be a cumulative easing of 75 basis points over 12 months.” Icra’s Nayar, however, said lower-than-expected wholesale inflation in November was unlikely to hasten rate cuts.
