The wholesale price index (WPI)-based inflation continued its downward march, reaching 5.27 per cent for the week-ended May 12 and raising hopes of a possible end of the interest rate tightening cycle by the Reserve Bank of India (RBI).
In its slack-season credit policy last month, the RBI had pegged average annual inflation for 2007-08 at 5 per cent and said it would be in the range of 4.0-4.5 per cent over the medium term.
The fall in the rate of inflation is largely attributable to the base effect, not entirely due an actual fall in prices of the commodity categories. Primary articles, fuel and power, and manufactured products comprise the WPI.
The WPI-based inflation figures are calculated by comparing the weekly WPI of the current year with the corresponding week in the previous year. The year-ago week is called the base and a higher rate of inflation then means the current rate of inflation is falling, unless prices are going up much faster now.
In the week ended May 12, despite a rise in the prices of some primary articles and manufactured products, the rate of inflation fell from the immediate previous week when inflation was at 5.44 per cent. Inflation was 4.63 per cent during the corresponding week last year.
Effectively, this also means that the high rate of inflation, at above 6 six per cent during the last few months, was also because of low inflation during the corresponding period of the previous year.
The rate of inflation kept rising from June 2006 till it reached a peak of 6.58 per cent in the week ending January 27, 2007. So, unless prices really shoot up now, inflation for the rest of the year should be on a declining trend.
With a series of interest rates hikes in quick succession, the RBI has quite aggressively tightened the monetary screws in order to keep inflation in check. As the rate of inflation descends to the RBI’s comfort zone of 5 per cent for the financial year, the chances of further interest rate hikes are seen as diminishing.