India’s wholesale prices-based inflation rate fell to 4.7% in May — the lowest in more than three years — triggering demand for an interest rate cut by the Reserve Bank of India (RBI) amid expectations that a normal monsoon and bountiful harvest will further cool prices.
The decline in wholesale price index (WPI) inflation comes on the heels of a moderation in May consumer price index (CPI) inflation announced on Wednesday, to a four-month low of 9.31%. With summer rains well ahead of the average trend lines, there are hopes that a potentially bountiful summer harvest would push down the price curve even lower.
Analysts, however, said the rupee’s free-fall, which has shed more than 8% since May, if not arrested quickly, can turn out to be a party spoiler by only helping in fanning inflation. A weaker rupee will knock up commodity prices, widen the current account deficit — the difference between dollar inflows and dollar outflows — making the job that much tougher for RBI to pare interest rates in its review on Monday.
WPI-based inflation rate — India’s most watched price index - stood at 4.89% in April and 7.55% in May last year. "The recent slump in the rupee also remains the key upside inflation risk that the central bank will remain wary of. The recent coal price hikes and slump in the rupee will retard the downdraft in headline WPI in the near term. We doubt RBI will deliver a rate cut next week," said BNP Paribas in a research report on Friday.