The Wholesale Price Index (WPI)-based inflation rate fell to its lowest level since October 2002 because of an overall drop in prices of 435 articles that make up the index.
The annual rate of inflation is now at 3.03 per cent for the week ended February 21, as compared with 3.36 per cent for the previous week. It was 5.69 per cent in corresponding week a year ago.
Though the food inflation rate has dropped by more than a percentage point on a year-on-year basis, sugar prices have increased at an annual rate of 23.1 per cent in the reported week. Increase in domestic sugar prices is an area of concern for the government as it prepares to face the general elections.
Experts say the sharp decline in inflation rate provides an opportunity for the Reserve Bank of India (RBI) to further reduce key interest rates to stimulate economic growth.
“The RBI will slowly keep reducing the interest rates. It has been aggressive last year and could cut rates by small levels,” said DK Joshi, economist with Crisil Ltd, a ratings and advisory firm.
On Wednesday, the RBI had cut both repo (the rate at which it lends to banks) and reverse repo (the rate at which it takes liquidity from the system) by 0.5 percentage points to 5 per cent and 3.5 per cent, respectively. With this, the reverse repo rate is at the same level as administered rate for savings bank account. This is expected to take away the incentive for the banks to park their excess money with the RBI.
“Now I think it’s the banks turn to act. They have so far not responded to rate cuts by the RBI. We could see reduction in lending rates by one percentage point in the next two to three months,” Joshi added.
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On a week-to-week basis, the inflation rate for both primary articles and manufactured products were in the negative territory. These two make up nearly 80 per cent of the index. Fuel group remained at the same level as last week.
In “Primary articles”, inflation declined to 6 per cent in the current week against 7.3 per cent in the previous week. Fuel group remained at the same level as last week. Manufactured products, which constitute 64 per cent weight in the index, fell to 4.5 per cent as compared with 4.7 per cent.
The finance ministry, in a statement, said it expects consumer price inflation to come down in the next few months because of “declining trend in the WPI food items”. The various monthly Consumer Price Index (CPI)-based inflation measure ranged between 10.5 per cent and 11.4 per cent.