Inflation rate fell to a near 10-month low of 6.38 per cent in the third week of December, mainly due to lower prices of food articles, minerals, and industrial and aviation fuel, even as analysts called for aggressive monetary measures to ward off a creeping deflation.
With wholesale price-based inflation likely to dip to 2-3 per cent by March, analysts feel the central bank should go for a 100-basis-point cut in repo, the rate at which it lends, and reverse repo, the rate at which it borrows.
The annual wholesale price index (WPI), the widely watched inflation measure, rose 6.38 per cent for the week ended December 20, compared with 6.61 per cent in the previous week. This was the lowest reading since March 1. Inflation has now more than halved from the peak level of 12.91 per cent reached in August 2008.
“I expect inflation to fall to 2-3 per cent by March-end this year,” said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
All three groups — primary articles, fuel and manufactured products — declined during the December third week. Inflation in the fuel group continued in the negative territory.
The primary articles group declined by 8 basis points to 12.07 per cent, compared with 12.15 per cent in the previous week. Manufactured products, which have the highest weight in the WPI, fell by 20 bps to 6.8 per cent over the previous week.
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“I expect deflation in patches by July-August and it may last for a short period,” Joshi added.
On a week-on-week basis, aviation turbine fuel dipped by 13 per cent, industrial fuel prices fell by 3-7 per cent, and key food items like vegetables by 2.20 per cent.
To stop the economy going into deflationary situation, the Reserve Bank of India (RBI) need to take aggressive monetary steps like cut in repo and reverse repo by up to 100 basis points, experts said.
“If the RBI doesn’t take immediate measures, inflation may even fall to around 2 per cent in the middle of February,” said Soumendra K Dash, chief economist at CARE Ratings, a credit rating agency.
Deflation occurs in an economy when the negative inflation prevails for a long period. In the event of deflation, the central bank will have to enhance money supply and lower rates further to support inflation. “Deflation is creeping in and unless the RBI takes aggressive monetary measures to boost demand, deflation will prevail in the country,” Joshi said.