Headline inflation, or inflation based on the wholesale price index (WPI), has weighed in at 6.55% for January — the lowest level since November 2009 when it read 4.73%.
Experts attribute the fall to base effect and a seasonal cooling of food prices, though core inflation has also slowed somewhat.
“We are not changing our view of a repo rate cut earlier than April. This is because we feel the drop in WPI is cosmetic in nature,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
“The drop was mainly due to high base effect. If there is a fuel price hike, then there are possibilities of an upward bias in WPI,” said Pan.
Monthly food inflation entered the negative zone in January, at -0.5%, compared with 17% during the same period last year.
The difference was mainly because of heavy rains in 2010, which had caused a loss of foodgrain and a spike in food prices.
“Policies have also played a part, with lack of adjustment to diesel and coal prices keeping inflation artificially low,” HSBC economist Leif Eskesen noted in a report.
“Yet, some of the decline in core inflation is real. In the case of textiles, an improved cotton harvest amid feeble demand has lowered inflation. Also, the slowdown in growth engineered through previous rate hikes is playing a role,” Eskesen noted.
Fuel inflation, on the other hand, stood adamantly at 14.2% compared with 14.9% in December.
“I think it (inflation) should be further reduced since it is still not at an acceptable level… (I) now expect that the March-end 2012 inflation will be closer to 6%,” PTI quoted finance minister Pranab Mukherjee as saying.
The sharp decline in inflation gives some analysts reason to believe the Reserve Bank of India is now in a better position to cut key rates at its March 15 policy meeting.
Incidentally, the January number is well under the 7.47% recorded in December and the Reserve Bank of India’s target of bringing it down to 7% by March.
“By March 2012, WPI will be around 6.25-6.50%,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.
“The pace ofrise in manufactured products has also slowed down. Earlier, we were thinking that rate cut may happen in April. But now we are not ruling out the possibility of a repo rate cut of 25 basis points in March policy review of the RBI,” said Prasanna.
Others, however, aren’t quite as convinced.
“The central bank remains concerned about medium-term risks to inflation from fiscal slippage and could prefer to wait for the announcement of the FY13 Budget in mid-March before trimming repo rates and outlining the tone of its policy stance for the year ahead,” HDFC Bank economists Abheek Barua, Shivom Chakravarti and Jyotinder Kaur said in their report.
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