Inflation cools to lowest level since January

India’s inflation rate slowed in November to its lowest level since January. The benchmark wholesale price index rose 7.48% in November from a year earlier, slower than the previous month’s 8.58% increase.

The median estimate of 27 economists in a Bloomberg survey was 7.45%.

The index inched up by 0.42% when compared on a month-on-month basis.

The change was attributed mostly to cooling food prices and a high statistical base of comparison from a year ago.

The data, released on Tuesday by the Ministry of Commerce and Industry, show that price pressures in India’s economy are easing, but not as fast as authorities would like. That has fuelled market expectations of more near-term rate hikes, despite the central bank’s recent hints that it would pause in its tightening cycle.

The annual rate of food inflation was down to 9.41% in November from 14.13% in October 2010. “Inflation is on a declining trend as expected, largely led by softening food articles inflation, although non-food articles are showing some stickiness. Now, the government’s policy with regards to hike in diesel and petrol prices will be closely monitored,” said Nischal Maheshwari, head, Research, Edelweiss Securities.

The major reason seen for the decline in WPI (base: 2004-05), however, is due to the base effect, said Sujan Hajra, chief economist, Anand Rathi Financial Services.

“Inflation has come down mostly because of the base effect, but on a month-on-month basis the prices have gone up. Last year, between October and November, the prices had gone up very sharply, that is the reason why inflation has come down to 7.48% presently,” he said.

The index for manufactured products, which accounts for nearly two-thirds of the total weight in WPI, was at 4.56% in November, marginally down from 4.75% in October. Within this group, the index for food products group declined to 0.57% from 3.02%.
Looking forward, the inflation outlook for this fiscal is close to 6-6.5%.

“Given the imminent hike in fuel prices, we could see inflation to be at 6.5% by end march. In fourth quarter of this fiscal, we expect the rate to move up from the January level. Though headline inflation has come off the highs, the rate expectations have not eased.

"They remain elevated, and month over month the index has been moving up. Headline inflation has begun to ease and will continue to ease until January, but is expected to move up in February and March and thereafter. The reasons being global commodity prices remain high as well as the base effect wears off,” said Shubhada Rao, chief economist, Yes Bank.