Bringing some joy in the New Year, inflation dipped to a 10 month low of 6.38% for the week ended December 20, mainly on account of lower fuel prices. Inflation was marginally higher at 6.61% in the previous week.
The decline in inflation for the eight consecutive week, has also given hopes of a further easing in the monetary stance, especially at a time when the government is finalising another stimulus package.
With its focus now on boosting growth, Prime Minister Manmohan Singh met the Governor of the Reserve Bank of India Duvvuri Subbarao earlier this week to discuss another round of cuts in key bank rates. A 100 to 150 basis point cut in the repo, reverse repo and cash reserve ratio rates is expected.
The government in its Mid-Year Economic Review tabled in Parliament last month, had also said a reduction in key policy rates in the next six to 12 months is essential to sustain an economic growth of 7% to 8%.
?Inflation is clearly on the decline and both the government and the RBI seem reasonably convinced about another round of rate cuts, which will inject more liquidity in the system. I expect a reduction in reverse repo and repo rate by 50 basis points while the cash reserve ratio may be cut down by 50 to 100 bps,? Abheek Barua, chief economist HDFC Bank said. Inflation may in fact ease to1.9% by March this year, if fuel prices are cut further and the 4% reduction in excise duty gets reflected in the whole sale prices, he added. Crisil Principal Economist DK Joshi also expects the steady decline in prices to continue and drop to about 2% by March.
For the week under review, cheaper fuel prices were responsible for the drop in inflation. The index of fuel items came down by 0.5% mainly because of the 13% decline in the price of aviation turbine fuel. Bitumen prices also fell by 7%, light diesel by 6% and furnace oil by 3%. While petrol and diesel prices are regulated, prices of ATF are market determined.
Meanwhile vegetables and fruits also became cheaper but on the whole many primary articles continued to register an increase in prices. While pointing out that ?inflation has consistently been on the decline for eight weeks now,? the finance ministry conceded that, ?some of the items still record increases in the week-on-week inflation rate, including most cereals and pulses except moong and arhar, gur, rape and mustard oil, fruits like apples, pineapples, bananas, raw rubber and newspaper.? ?Contribution of primary articles to the year-on-year inflation rate for the week ending December 20, 2008 shows that this group accounted for 42.8%, as against their share of 22% to the WPI basket,? the finance ministry said.
Manufactured products recorded a 6.8% dip in inflation, signaling that the 4% reduction in excise duty announced as part of the fiscal package on December 3 also seems to have taken effect. The revised inflation rate for the week ended October 25 remained unchanged at 10.72%.