India’s wholesale inflation rate has slumped to 0% in November, a five-and-a-half year low, driven by tumbling fuel and food prices. The fall in the inflation rate coincides with the beginning of a spike last year that took the rate to 7.52% and food inflation to an eye-popping 19.52% in November 2013.
Between May and November last year, the rate had climbed from less than 5% to over 7% before beginning to fall back again from December. It is highly unlikely that the surge in oil, and other commodity, prices that led to last year’s runaway inflation will return to haunt net importers such as India, at least in the coming months. Petrol prices have fallen 10% while diesel prices fell 3% in November from a year ago, mirroring the slump in crude oil prices that have slid more than 40% since June from $115 to a barrel to below $65 a barrel.
The happy fallout is that the inflation rate in India will remain low and stable for at least the next few months. It permits monetary easing with a degree of aggression not on display since the dollars started fleeing back to the United States in the wake of the financial crisis in 2008. Technically, the Reserve Bank of India can drop its overnight interest rates to zero without making money free for banks. Rate cuts by the RBI have been trailing market expectations and the clamour for another one has been rising over the last few months. Zero inflation gives RBI governor Raghuram Rajan the space to cut borrowing rates and pump more money into the system to aid investment and consumer spending.
The fall in inflation could also be partly because of a statistical phenomenon called the ‘base effect’, where a drop looks magnified because of higher prices the previous year, particularly in the case of onions, vegetables and fuel. The November wholesale inflation rate is the lowest since the 0.3% contraction of July 2009, reflecting a similar retail inflation trend that has moderated to 4.38% last month. Wholesale onion prices have fallen from about Rs 60 a kg this time last year to less than Rs 25 a kg now, showing a fall of about 57%. For the time being, cost-push inflation is one worry less for our crisis managers, at least in the short term.
This unprecedented window significantly widens options and gives elbow-room to address more pressing structural issues such as reforms and fiscal consolidation that are critical to steer the economy out of the current slide. Parliamentarians and policymakers should make the best use of the warm glow of the static price line as long as it lasts.