The case for a much-coveted cut in interest rates by the Reserve Bank of India at the scheduled early-February policy review turned strong and unassailable on Wednesday as the government said that the Wholesale Price Index (WPI) rose only a flattish 0.11% in December. WPI inflation, which used to be the RBI’s gauge for price pressures in the economy until it began to target inflation based on consumer prices a year ago, had hit zero in the previous month, the lowest since July 2009.
The benign WPI inflation figure for December came on top of lower-than-expected retail inflation of 5% for the same month reported earlier and was helped by a debilitated build-up in prices of manufactured products in recent months, coupled with a steep annual fall (and considerable month-on-month decline) in fuel prices. Monday’s Consumer Price Index (CPI) data had revealed that even as the base effect for the index wore off, food inflation edged up a notch while core inflation continued to decline.
Proving that demand pressures are almost non-existent in the economy, wholesale prices of manufactured products declined 0.3% in December from the previous month and were up just 1.57% annually, aided by comprehensive month-on-month price falls across items like sugar, cement, minerals, metals, chemicals and textiles.
Manufacturing-products inflation’s build-up since March has been a measly 0.45%, compared with 2.56% in the same period a year ago. Core or non-food manufactured items’ WPI inflation has steadily slowed in recent months — from 4% in July 2014 to 3.5% in August, 2.8% in September, 2.5% in October, 2.2% in November and further to 1.3% in December.
Analysts said the RBI could now signal its intent to address tepid investments and consumption with a moderate reduction in rates without appearing to have compromised on its stance where price stability is the most important of a set of targets, including growth.
Wholesale fuel prices fell an annual 7.82% last month, their biggest fall since September 2009. Month-on-month, the prices were down 2.4%. A near 60% fall in global oil prices since last June has multiple benefits for the Indian economy: The annual import bill could be less by a third or around $50 billion, and lower fuel prices could have a sobering effect on prices of most goods, including food items, due to reduced transportation costs.
Given that the rise in WPI has been slow since November 2013, the coming year’s readings would, however, have less support from a favouring (high) base, but the continued decline in global crude prices (on Wednesday, Brent crude was trading below $46, a six-year low) could more or less keep the index’s year-on-year spurt curbed in the short-term.
“Falls in commodity prices have brought down WPI and CPI alike. All indicators now point that the RBI should cut rates by at least 25 basis points in its next policy meeting on February 3,” said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.
Wholesale food inflation in December moved to a five-month high of 5.2%, with pulses, potatoes, fruits and milk turning costlier. Inflation in “primary articles” constituting a fifth of the WPI was 2.17% in December compared with -0.98% in the previous month. Among fuels, petrol became cheaper by about 12% from a year earlier while diesel was 6.3% cheaper than the corresponding month a year ago.
Commenting on the latest WPI data, Jyotsna Suri, president, Ficci, said: “India can draw some comfort from the sharp drop in oil prices, which is reflected in the drop in fuel led inflation by 7.8%. Given the slow pace of global recovery and expectations of oil prices to remain at low levels going forward, inflation is expected to remain under control.”
Industrial production grew at a faster-than-expected 3.8% in November, smartly recovering from a three-year trough of -4.2% in the previous month thanks largely to a mild pick-up in manufacturing, but the continued deep contraction witnessed in consumer durables showed demand is extremely weak.
According to Suri, “The recovery noted in manufacturing in November 2014 comes over a low base and we are not yet sure about a firm turnaround. To give a boost to the capex cycle, there is an urgent need for lowering of lending rates.”
PHD Chamber president Alok B Shriram echoed this as he said that inflation worries were “behind us”, adding that current demand and supply dynamics indicated that (WPI) inflation would consolidate at around 3% (average) in 2015.