India’s wholesale inflation rate plunged to 3.74% in August, the lowest in almost five years, aided by a sharp drop in vegetable and petrol prices, data released Monday showed.
The more than one percentage point drop in wholesale inflation rates over July’s 5.19%, should bring cheer to the NDA government that rode to a landslide election victory promising to bring down prices of essentials as part of its poll pledge to usher in `Aachen din’ (Good days).
It was also the lowest since 1.79% of October 2009, a period when demand for goods fell sharply battered by the worst global recession in 80 years.
Besides, with crude oil prices falling to two-year low of $97 dollar a barrel, expect retail petrol and diesel prices to come down further.
Wholesale food inflation, a measure of how costly the platter has become, grew 5.15% compared to the previous month’s 8.43%. Wholesale vegetable prices fell 4.88% in August on a year-on-year basis, while onion prices plunged 41%.
Prices of protein-rich food items such as pulses, milk, and fruits have risen faster that overall food prices growing at 7.81%, 12.18% and 20.31% in August.
As the tens of millions of people shift to higher standards of living, the focus is changing from basic needs of nutrition to such as rice and coarse grains to more aspirational protein-rich products, a trend that economists describe as structural inflation.
`Manufactured products inflation’—a broad index to gauge price movements of industrial goods—was only marginally lower at 3.45% in August compared to July’s 3.67%, but significantly higher than last August’s 2.31%.
In the current context, high manufactured products’ inflation implies greater demand and sales of consumer and investment goods, mirroring revival signs in the Indian economy that is battling to claw out of a quarter-century slump.
RBI Governor Raghuram Rajan has made taming inflation one of its top priorities, despite business leaders clamouring for rate cuts.
"I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when it is feasible and that would be when we have won the fight against inflation," Rajan said in Mumbai.
"There is no point in cutting interest rates to see inflation pick-up again," Rajan said, adding that right now he thinks the central bank is continuing the way it proposed recently.
Retail inflation eased in August to 7.8% year-on-year from 7.96% the previous month, data showed last week, although that is still above the central bank's target of 6% by 2016.
Industry leaders have been ratecthing up their demand for lower borrowing costs to assist investment plans, critical to spin jobs and multiply income.
“Coming shortly before the monetary policy, this (low inflation rate) should also provide the necessary maneuvering space to the RBI, “ said Chandrajit Banerjee, CII director general.
Analysts, however, cautioned that the time to open the bubbly may be still far away as part of the fall in wholesale inflation, is also because of a high base effect—a statistical phenomenon that magnifies small changes, although the real fall may not be very large.
The rupee’s value—it fell 48 paise to close at 61.13 to a dollar on Monday—can also partly offset the gains from falling crude oil prices.
Every time the rupee depreciates by one rupee against the US dollar, the fuel subsidy bill bloats by Rs 8000 crore is added to the fuel subsidy bill.
“It remains to be seen how agricultural produce prices move from here on and particularly in the October – November ’14 period given the monsoon this year has been delayed and largely subdued.
We do not expect any change in RBI’s policy stance later this month and thereby expect the repo rate to be status-quo at 8%,” Care Ratings, a credit ratings agency, said in a research report.