WPI inflation rises marginally to 0.11%, but experts say RBI will look at overall trajectory and fiscal numbers to take a call on interest rates
The Reserve Bank of India (RBI) may wait till post Union budget to cut interest rates after reviewing the fiscal numbers of the government and the roadmap to achieve its targets.
The wholesale price index (WPI)-based inflation rose marginally to 0.11% in December from 0% the previous month, mainly on account of an increase in prices of food items, particularly fruits. But economists say that RBI will not be swayed by seasonal increases but will look at the overall trajectory. RBI target was to bring the consumer price index (CPI) to 8% by January 2015 and 6% by January 2016.
The CPI at 5% is even lower than the targeted figure for 2015.
The inflation in manufactured products, which have the highest weight on WPI (almost 65%), declined on sluggish demand and global cues. Fuel prices also declined as global crude oil rates fell, according to the government data.
D K Joshi, chief economist at ratings agency Crisil, told dna, "We expect the RBI to cut rates only after the budget. The inflation is likely to rise as the base effect wears off, and even the retail inflation is going to rise. But the price of crude oil will be a big saver giving room for RBI to slash rates."
Overall, inflation remained moderate, even if marginally higher than November, raising hopes the RBI might lower the policy rate next month or after presentation of the Budget, to spur economic growth. Though RBI now tracks retail inflation more than wholesale, WPI is a lead indicator for even retail price inflation.
During the month, the rate of retail inflation also rose to 5% from an all-time low of almost 4.4% in November. According to data released by the government on Wednesday, fuel and power prices contracted 7.8% in December, while prices of food articles rose 5.2% over the year-ago period. The inflation number for October was revised downwards to 1.66% from 1.77%.
Saugata Bhattacharya, senior vice-president and economist, Axis Bank, said, "RBI may bring down rates only after the budget but inflation is going to increase with the base effect wearing off. If we factor in the fall in crude prices, expecting the price per barrel to stabilise around $52 a barrel, the average inflation in the next financial year will be 1.8%."
In the September quarter of the current fiscal, India's economic growth declined to 5.3%, compared with 5.7% in the previous quarter. And, official data released so far has given little hope of a resurgence anytime soon. The country's industrial production, for example, contracted 4.2% in October and rose 3.8% in November.
IDBI Bank said in a report, "A subdued headline WPI inflation, coupled with a five-year low core inflation and sustained fall in food prices, is expected to provide considerable comfort to the RBI in taking the decision to ease interest rates in the economy. However, we remain of the opinion that the initiation of rate easing would take place post the announcement of Union Budget. The decision to ease rates, then, may not be restricted to scheduled policy dates, and the quantum too may not be restricted to 25 basis points."
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