India’s wholesale (WPI) inflation rate dropped for the sixth consecutive month in April to a new low of (-)2.65% , raising expectations of another round of interest rate cut by the Reserve Bank of India.
The RBI has reduced the repo rate — the rate at which banks borrow from it — by 0.50 percentage points since January. It currently stands at 7.50%
The decline in wholesale price index (WPI)-based inflation came two days after figures showed consumer inflation at its lowest level of 4.87% in four months.
The fall in WPI inflation was largely due to lower prices of fuel and manufactured goods, though the quantum of decline was much steeper than expected.
Wholesale inflation stood at (-)2.33% in March and 5.55% in April last year. Coupled with factory output data that continues to be sluggish, it has strengthened the case for a rate cut to bring down equated monthly installments (EMIs) and fuel growth in consumer demand.
“Fundamentals such as the fall in consumer inflation are suggesting that the RBI can afford a 0.25 percentage point rate cut by June 2,” said Shubhada Rao, chief economist with Yes Bank.
The RBI is scheduled to come up with its monetary policy review on June 2.
WPI, which measures a bigger basket of goods than consumer inflation, was (-)2.17% in February, (-)0.95% in January, (-)0.50% in December and (-)0.17% in November.
A UN report released on Thursday said declining inflation has provided space to central banks in the Asia Pacific region, including India, to lower their policy rates.
“Domestic compulsion is clearly in favour of reducing rates,” said Subir Gokarn, former RBI deputy governor. “Inflation is lower than expected.”
Industry bodies, too, reaffirmed their demand for a rate cut.
“We look forward to another round of downward revision in the repo rate and subsequent transmission of same by banks to encourage on-ground investments,” said Jyotsna Suri, president, Ficci.
RBI governor Raghuram Rajan has flagged the risk of a rise in inflation if global oil prices surge. India imports a majority of its crude requirements. The impact of crop damage due to unseasonal rains on food prices could be another stumbling block towards a rate cut."The RBI cannot afford to reverse the rate cycle just a few months down the line if food inflation goes beyond acceptable limits," said Arun Singh, senior economist, Dun & Bradstreet. "It will wait for stability."