The more than one percentage point drop in wholesale and retail inflation rates as fresh seasonal arrivals pushed down vegetable prices in December should come as a welcome relief for the UPA government. Retail and wholesale inflation capture shop-end and warehouse data respectively and both the price curves have demonstrated a similar gradient. Retail inflation grew by 9.87% and 6.16% in December compared to 7.52% and 11.16% in the previous month.
The sharp fall in food inflation has come from the worrisome highs of near 20% to about 13.7%. Vegetable prices have fallen in December compared to last winter. Stubbornly high prices of onions have fallen sharply from about Rs 80 a kg in November to about Rs 20 currently. Bumper crops are likely to help temper prices down further.
The easing of inflation rates will likely prompt the Reserve Bank of India (RBI) to keep interest rates on hold in its monetary policy review later this month. India’s business leaders have been clamouring for an interest rate cut arguing that costly borrowing and raw material costs have crimped expansion and hiring plans. Last month, in an unexpected move, the RBI kept the repo rate unchanged at 7.75%.
Industry leaders and consumers would be hoping for a repeat action from the central bank. A status quo on interest will likely defer the possibility of an immediate hike in home loan EMIs. Importantly, the government’s macroeconomic managers would be hoping that India is indeed headed towards a period of relatively moderate inflation.
There is no gainsaying the fact about the wider significance of high prices and sticky inflation in an election year and last month’s assembly election results were pointer to this. With national elections less than four months away, all political parties are keeping an eye on the price movements that can turn out to be among the most important variables determining which way the voters’ mood swings.