However, although the central bank concedes that a decisive economic recovery was unlikely before the last quarter of this fiscal and many analysts argue that upside risk to its CPI inflation target of 6% for January 2016 has vanished, not all would yet bet on a rate cut before the latter half of 2015.
Although helped by favourable bases, the rather sharp moderation in wholesale price inflation spanned almost evenly across major segments from food and fuel to metals, chemicals and other manufactured products.
WPI food inflation moderated to an almost two-and-a-half-year trough of 3.5% last month on slow pace of rise in vegetable prices. The plunge in WPI inflation (it was 3.74% in August), on top of Consumer Price Index-based inflation slowing to a record low of 6.46% in September, offered much-needed relief to the Narendra Modi government that had made persistently high inflation during the previous UPA government a major poll plank. Despite the surge in sentiments aided by the new government, there isnt yet any hard evidence of a pick-up in investments or consumption, though.
Had a 90.2% jump in potato prices not been reckoned, food inflation would have looked even lower at 2.5% and headline WPI inflation at 2.2%. Fuel inflation hit a near-five-year low of 1.33% on softening (a 20% fall since June) of global crude prices.
Finance minister Arun Jaitley was quick to add that inflation in vegetable and protein-based food items that have been contributing to the recent increase in inflation rates have shrunk thanks to the steps taken by the government.
We are committed to continuing reforms in food markets that will improve supply responses and keep inflation low and stable. At the same time, fiscal consolidation and a new monetary policy framework will help bring down inflationary expectations, he said.
Analysts said easing prices of commodities globally, especially brent crude oil, a rebound in monsoon rains after initial dry spells, a modest hike in the minimum support prices of summer-grown crops and huge grain stocks in official granaries have added to the optimism of policymakers about slowing inflation rates. Since food and fuel items make up for around 60% weight in the CPI basket, they don't see any sharp rise in both the inflation gauges in the rest of the year. The monthly CPI inflation had risen in the range of 9.9-11.2% in the October-December quarter in the 2013-14 fiscal, providing a conducive base for calculation this fiscal.
What augurs well for the economy is that electricity generation grew in double digits for a third straight month through August, suggesting that some projects have been taking off on the ground and more might be in the offing. Passenger vehicles have been growing since May after hitting a two-year low, while medium and heavy truck sales started rising since August after falling for 30 straight months.
However, risks remain. A near-collapse of private demand, as reflected in consumer goods output dropping in 14 out of the 17 months since the beginning of the last fiscal, coupled with persistent weakness in the capital goods segment have reinforced doubts if the economy has indeed turned the corner.
The RBI in a recent Working Paper attributed recent years' stubborn food inflation to various factors, such as increasing demand particularly that arising from higher rural wages, rising agricultural cost of production, changing consumption pattern favouring protein items, increase in minimum support prices and droughts in certain years. It added the long-run impact of hikes in MSP of food crops, namely, rice and wheat, and input cost inflation (except wages) on food inflation were not as overbearing as was generally perceived. While RBI maintains its view of an upside risk to its 6% CPI target, we believe that the upside risks have subsided materially given the benign outlook on global commodities, stable trends in the rupee, drop in core CPI momentum and continued supply-side efforts to contain food inflation. As a result, we reiterate our view that the window to ease rates could open up in 2015, said Rohini Malkani, an economist with Citi.
Importantly, core WPI inflation, price rise in non-food manufactured items, eased to 2.8% last month, compared with 3.5% a month before, a sharp upward revision in July core data by 40 basis points to 4% stoked concerns of similar revisions of the latest data as well. Core CPI, too, dropped to a record low of 5.9% in September, compared with 6.9% a month earlier. Sanjay Mathur, head of economics research for Asia Pacific at Royal Bank of Scotland, said the weak growth momentum and the attendant negative output gap helped drag down inflation. Low levels of demand, as reflected in suboptimal capacity utilisation, have diminished pricing power of Indian companies.
Analysts said easing inflation numbers may prompt the RBI to reconsider targets set by the Urjit Patel panel set for January 2015 and 2016. As the world commodity prices remain low and the the US Fed tapers its stimulus programme even more next year, we shall see inflationary pressure easing. Of course there is a risk of food prices rising again, but on the positive side, deregulation of diesel prices can come any day now. So even the target of 6% can be achieved earlier, said NR Bhanumurthy of National Institute of Public Finance and Policy.