Inflation fell below the psychologically worrisome 5 per cent for the first time in 10 months. This will provide the government higher fiscal and monetary maneuverability to sustain India’s high growth rate.
Inflation based on wholesale prices fell to 4.85 for the week ended May 26, and the latest price data came barely a week after India galloped into the league of high- growth economies with the gross domestic product (GDP) swelling 9.4 per cent in 2006-07. Inflation was 5.06 in the previous week.
The fall in inflation, driven by cheaper food prices, might take the pressure off the Reserve Bank of India to execute further monetary tightening to control the runaway price line.
In its slack season credit policy in April, the RBI had pegged the average annual inflation rate 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. With a series of interest rates hikes in quick succession the RBI has aggressively tightened the monetary screws.
While the government has cut duties on several products, including cement and edible oils, the RBI has hiked the cash reserve ratio (CRR) and the repo rate to contain inflation.
The decline in food prices was significant, with prices of fruits dropping 2.8 per cent. Vegetables also became cheaper by 1.1 per cent, and prices of pulses fell by 0.8 per cent. The arrival of the first few consignments of imported pulses might have eased prices.
The government had decided to import 1.5 million tonnes through public sector trading agencies and 115,000 tonnes have arrived on Indian shores.