Wholesale price inflation touched -0.90% in January, compared with -0.73% in the previous month, holding in the negative zone for 15 months in a row, showed official data released on Monday.
While the WPI’s protracted fall offers some relief to consumers, producers’ pricing power remains dented. The real policy rate (repo rate minus WPI inflation) for firms rose from 2.45% at the start of FY15 to 8.17% when WPI inflation first turned negative in November 2014.
It went up sharply to 12.31% in August last year when wholesale price inflation was at its lowest in the current series and was 7.65% in January. This, along with factors like low capacity utilisation, subdued demand and a gloomy external environment, has discouraged fresh investments and pressured companies’ balance sheets in good measures.
As base rate for bank lending is around 2 to 3 percentage points higher than the repo rate, the real interest cost for companies in the negative inflation regime would be correspondingly higher.
Companies in the commodity businesses, like those in the oil or steel sectors, have faced the brunt of the negative WPI inflation in the form of high real interest rate, said Saugata Bhattacharya, chief economist at Axis Bank. Servicing the debt became a real problem for such companies, which were already leveraged to the hilt, he added. But companies dealing with non-tradables, like in the services sector, were not that affected.
However, analysts said the WPI data may be giving a flawed picture of the price pressure in the economy as these are based on the old series, while the Consumer Price Index (CPI) series is an updated one. The new series with the 2011-12 base year, expected by September, will bring in more clarity, they added.
The easing of food inflation in January to 6.02% from 8.17% in December drove down the WPI further, and helped widen the gap with the CPI for the same month (the latter touched a 17-month high of 5.69% in January).
Still, inflation in pulses continues to remain high (44.91%) and that in vegetables was 12.52% in January. Fuel and power inflation hit -9.21% in January, compared with -9.15% in December, reflecting subdued global crude oil prices. Inflation in manufactured items stood at -1.17% in January, against – 1.36% in December.
Seeking a rate cut, Chandrajit Banerjee, director general at CII, said inflation would continue to remain benign as global commodity prices are anticipated to remain subdued in the year ahead.