Annual wholesale inflation in March dropped to its lowest in more than three years at 5.96% from 6.84% a month ago, as food, fuel and manufactured products turned cheaper, raising expectations of a rate cut by the central bank at its next monetary policy review on May 3 to prop up faltering growth.
Significantly, core inflation — the price rise in non-food manufacturing products, which are a key input for monetary policymaking — hit its lowest in three years in March, registering its seventh straight monthly drop, thanks to a slowdown of the economy. Analysts wager on a rate cut in May, albeit modest.
The government raised the January inflation estimate to 7.31% from 6.62% announced earlier and analysts ascribed it largely to the revision on fuel price hike, adding that inflation would have been 6.93% had fuel prices not been raised. Policymakers expected inflation to drop further in the current fiscal, while industry chambers renewed clamour for a significant cut in policy rates. A meagre 0.9% growth in industrial output during the April-February period also piled up pressure on the RBI to ease borrowing costs of firms.
“I hope that we will continue to see that (moderation in inflation) often. I have to say that monthly numbers can jump around, but it has been our view that in a gradual way inflationary pressure is coming down,” said Planning Commission deputy chairman Montek Singh Ahluwalia.
“While March inflation was supported by a favourable base (it was 7.69% in March 2012), soft sequential momentum in prices is a reflection of the impact coming from lower commodity prices, amid a dilution of pricing power caused by a negative output gap in the economy,” said Shubhada Rao, chief economist, YES Bank.
Negative output gap refers to a situation when the actual output is less than full-capacity output, suggesting underperformance by an economy.
Food inflation — which kept headline inflation at elevated levels despite a drop in prices of manufactured items of late — declined for the first time in five months to 8.73% in March on cheaper vegetables, fruits and milk.
Inflation in manufactured items, which have a 65% weightage in the inflation basket, slowed to 4.07% in March 4.51% in the previous month, the lowest in 39 months. Fuel products saw a 10.18% inflation last month, compared with 10.47% in February.
?Going ahead, we expect this trend to continue and this should give more space to the RBI for considering a cut in the policy rates. Particularly noteworthy is the fact that non-food manufacturing inflation continues to remain under restrain?, said Ficci president Naina Lal Kidwai.
Wholesale inflation is expected to drop to 6.3% in 2013-13 against 7.3% in the last fiscal, thanks to expectations of higher agricultural output (assuming normal monsoons), lower international crude oil prices and further weakening of demand-side pressures, a Crisil Research note said.
“While core inflation may pick up momentum in the second half of the fiscal year as demand recovers slowly, average core inflation for 2013-14 is expected to be lower than in 2012-13.The probability of inflation surprising on the downside is high, in our opinion,” it added.