India’s wholesale inflation fell by a sharp 4.05% in July, the ninth straight monthly decline, aided by cheaper crude prices that have cantered below $50 per barrel in recent days.
The fall in inflation rates to an all-time low have triggered hopes that the Reserve Bank of India would likely cut interest rates ahead of its scheduled monetary policy review on September 29.
The wholesale price index (WPI)-based inflation, the broadest measure to capture economy-wide price movement of goods, stood at (-) 2.36% in June, and 5.41% in July last year.
Data released on Tuesday showed that India’s retail inflation moderated to a multi-year low of 3.78% in July from 5.40% in the previous month, raising hopes of an interest rate cut
Consumer price index (CPI)-based inflation — which measure changes in shop-end prices — acts as the RBI’s main guide on interest rate-related decisions.
The two indices assign different weights to different items. In CPI the weight of food and beverages is 46%, while in WPI it is 14.22%. This means that a rise in the price of vegetables will have different effects in WPI and CPI.
Also, the CPI takes into account services and housing, which the WPI does not do and the number of items mentioned, their selection and the point at which their price is collected is also different for WPI and CPI.
“The downturn in both retail and headline inflation makes a strong case for the RBI to reduce interest rates even before the next monetary policy announcement,” said Chandrajit Banerjee, director-general, CII.
The RBI has cut its key lending rate — the repo rate — thrice since January to 7.25%. However, the finance ministry said on Friday that banks have not been able to pass on the full benefit of the rate cut to consumers since their costs of deposit were still high. Besides, “the transmission of the RBI’s rate cut comes with a lag effect,” said Hasmukh Adhia, secretary, department of financial services.