Inflation declines to 5-month low at 6.16 pc, RBI may ease interest rates to prop up growth

Written by PTI | New Delhi | Updated: Jan 15 2014, 22:29pm hrs
WPI inflationFood prices rose 13.68 per cent year-on-year in December, much slower than an annual rise of 19.93 per cent in November.
Wholesale inflation declined to a five-month low of 6.16 per cent in December, providing space to the Reserve Bank to ease interest rates and prop up growth.

Inflation in food articles was 13.68 per cent in December as against 19.93 per cent in the preceding month, according to the Wholesale Price Index (WPI) data released today.

Vegetables as a whole were costlier by 57.33 per cent, although the pace of increase in onion prices eased to 39.56 per cent from 190.34 per cent in November.

However, the rate at which potato prices rose was more than double at 54.65 per cent in December over the previous month.

Fruits were marginally cheaper as were protein-rich items such as eggs, meat and fish. Inflation in milk inched up slightly to 6.93 per cent.

Inflation in November was 7.52 per cent and in October, it was revised upward to 7.24 per cent from 7 per cent.

Earlier this week, the government said retail inflation fell to a three-month low of 9.87 per cent in December.

With industrial output contracting 2.1 per cent in November, the worst performance in six months, industry has sought a reduction in policy rates to help boost growth.

The Reserve Bank kept key policy rates unchanged last month on expectations that wholesale and retail inflation would ease. The central bank is scheduled to announce its quarterly monetary policy review on January 28.

The RBI had increased the key policy rate (repo) twice between September and November to check inflation. The rate is currently 7.75 per cent.

According to the WPI data, inflation in primary articles basket and the fuel and power segment was at 10.78 per cent and 10.98 per cent, respectively.

Inflation in manufactured products such as sugar and edible oils was flat at 2.64 per cent on a monthly basis.

December headline inflation eases to 5-month low

(Reuters) ndia's headline inflation eased to a five-month low in December on lower vegetable prices, providing some relief to the ruling coalition before a national election and increasing the odds that interest rates will stay on hold this month.

The Congress party is struggling to win back voters but is grappling with its worst economic slowdown in a decade amid surging food prices that have largely affected the country's rural poor.

The wholesale price index (WPI), India's main inflation indicator, climbed an annual 6.16 percent last month, its slowest pace since July 2013. The reading compared with a 7.00 percent rise predicted by economists in a Reuters' poll. Wholesale prices had increased 7.52 percent on year in November - their fastest clip in 14 months.

The pace of gains in December was tempered by a softening in vegetable prices that fell nearly 30 percent from November, bringing down overall food inflation for the month to 13.68 percent from 19.93 percent a month ago.

Wednesday's WPI data follows an easing in consumer inflation that slowed to a three-month low of 9.87 percent last month after vegetable prices dropped nearly 19 percent from November.

The latest inflation numbers are expected to give the Reserve Bank of India (RBI) some leeway to keep interest rates on hold at its upcoming policy meeting on Jan. 28.

"The WPI data has surprised on the downside and seen in conjunction with the CPI (consumer price index) data should strengthen the case for a rate pause in the Jan review," said A. Prasanna, an economist at ICICI Securities primary dealership Ltd.

Indian bonds as well as interest rate-sensitive shares rallied after the WPI data. The benchmark 10-year bond yield fell 5 basis points to 8.63 percent from levels before the data. The benchmark 5-year swap rate and the 1-year rate each fell 4 basis points, dealers said.


Wholesale prices for vegetables had surged 116 percent between March and November, resulting in a drubbing for the ruling Congress party in recent state elections.

Cooling prices will bring some relief to the party as it heads into national elections due by May, seeking a third term. Most opinion polls are predicting heavy losses for the party, in part due to its failure to control inflation.

Persistently high inflation in Asia's third-largest economy is pressuring household budgets and company profits, hitting consumer demand as well as corporate investments.

After raising interest rates twice since September, the RBI left rates steady last month, ignoring high inflation readings as it feared aggressive rate hikes could be damaging for a weak economy.

A surprise contraction in industrial production in November and a slowdown in merchandise exports growth last month suggest the central bank's growth concerns were not out of place.

But what could worry new RBI chief Raghuram Rajan is a pick up in core WPI inflation, which inched up to around 2.8 percent last month from 2.66 percent in November. Already, core CPI inflation is hovering around 8 percent for the past three months, a level Rajan deems as uncomfortably high.

"The moderating headline retail and wholesale inflation has definitely increased the likelihood of RBI maintaing a status quo in its January meeting," said Upasna Bhardwaj, an economist at ING Vysya Bank.

"However, with core inflation inching up, we believe RBI will continue to sound hawkish and hence do not rule out another 25 bps of rate hike in the next few months."

Soaring food prices are primarily responsible for India's long struggle with inflation. While the drought of 2009/10 flared up food inflation, good rains in the following years failed to cool prices.

Since then food inflation has been steadfast around double-digit levels, leading to demands for higher wages, which in turn have raised costs for companies.

Stubbornly high food prices are also chipping away at support for the Congress party as they mostly hurt the poor and low-income groups - the main voters for the grand old party.

In a bid to win back voters, the party has instructed its state governments to do away with middlemen in the sale of fruits and vegetables as part of its plan to stem price rise.

But its inflation fight is largely hobbled by its own welfare policies such as subsidised government purchases of grains that has not let food prices fall below a certain level.

Subsidised purchases of grains such as wheat and rice have also priced out vegetable cultivation, rendering the economy more prone to supply shocks.



"The WPI data has surprised on the downside and seen in conjunction with the CPI data should strengthen the case for a rate pause in the January review. However, with core CPI inflation quite sticky, I think that RBI is not done with rate hikes. I expect another 25 basis points rate hike by March."


"The maximum impact of the vegetable price decline is reflecting in the current numbers. If vegetable prices remain stable, January-February numbers should also be lower. These numbers obviously mean that a rate hike is ruled in January, and rates may even remain stable for an extended time."


"WPI data has been showing a significant fall due to the easing in food prices on expected lines. But based on one observation we cannot make a assumption of a trend.

"If we look at the services PMI, IIP, CPI and WPI combined, then these four data points suggest the RBI will maintain a status quo in the next policy.

"But I don't expect any rate cuts to begin in the near future because inflation continues to remain way above the RBI's comfort zone. There is also potential upside risks to inflation coming from global commodity prices especially oil prices."


"Primary articles has driven the inflation data this time. The RBI governor will watch for month-over-month momentum in core inflation. However, this data, in conjunction with what we saw in CPI, does indicate the RBI would continue with the previous meeting -- which is watching and waiting for more data. We believe a rate hike may not come in this meeting."


-- India's benchmark 10-year bond yield fell 5 basis points (bps) to 8.63 percent from levels before the data.

-- The benchmark 5-year swap rate and the 1-year rate each fell 4 bps, according to dealers.

-- The benchmark index, which had been up 0.9 percent before the data, extended gains to be up 1.1 percent.

-- Interest rate-sensitive stocks also gained. The NSE bank sub-index was up 1.8 percent, helping push the broader NSE index to a 1.1 percent gain.


- A cooling in food prices slowed down retail inflation to a three-month low of 9.87 percent in December, data showed this week.

- Industrial production output shrunk for the second straight month in November, by 2.1 percent, data showed last week, dragged down by a contraction in consumer goods output.

- India's trade deficit widened to $10.14 billion in December, data showed last week, on slowing export growth which could pose pressure on the country's fragile current account balance.