Economists say headline inflation to drop to 2-3% by 2008-09.
Inflation for the second week of December hit a nine-month low of 6.61 per cent as the global economy stalled, sending prices southwards. This will provide the Reserve Bank of India enough room to significantly cut rates again to boost the sagging consumer and industrial demand, economists say.
Economists now predict headline inflation to drop to 2-3 per cent by the end of the current fiscal. The government will then be able to borrow at 6 per cent. Companies, based on their debt rating, will be able to borrow at a premium to this rate.
The annual inflation for the “fuel and power” group slipped into the negative territory (to -0.18 per cent) as against 0.58 per cent in the previous week, said a finance ministry release. WPI inflation is reported with a two-week lag and these numbers are for the week ended December 13.
The inflation, after touching a peak of 12.9 per cent in the first week of August 2008, has declined due to a rapid fall in oil and metal prices.
“We expect the monetary policy to ease in the January policy review. We expect a 100 basis-point cut in the repo (rate) and a 50 basis-point cut in the reverse repo (rate) for the rest of the fiscal year”, said Shubhada Rao, chief economist with YES Bank. She expects inflation to fall to 2.25-2.4 per cent by March 2009.
In the first week of December, the RBI had reduced the repo rate (at which it lends to banks) and the reverse repo rate (at which it borrows from banks) by 100 basis points to 6.5 per cent and 5 per cent, respectively.
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Compared with the previous week, headline inflation declined by 23 basis points (one basis point is one-hundredth of a percentage point) for the week ended December 13, 2008. However, inflation was much lower at 3.84 per cent in the corresponding week a year ago.
“Inflation is now sliding because of base effect”, said DK Joshi, economist with Crisil Ltd, a ratings and advisory firm. He was referring to the high value of the index number in the corresponding week last year. However, on a week-on-week basis, overall index number declined by 0.2 per cent, reflecting downward movement of aggregate prices, he said.
FOOD PRICES CONTINUE TO RISE:
However, inflation for “primary articles,” which contains food articles, increased by 34 basis points to 12.15 per cent in the reported week, as compared with 11.81 per cent in the previous week ended December 6.
Thus, primary articles- which have a weight of 22 per cent in WPI- contributed to 42 per cent of the inflation in the week ended December 13, 2008, said a government press release.
Annual rate of inflation for ‘food articles’ increased by 27 basis points to 10.46 per cent for the week ended December 13. It was 2.33 per cent in the corresponding week a year ago.
However, inflation of manufactured products continued to decline because of continued fall in metal prices and industries passing on excise duty cut announced by the central government in the first week of December.
The final inflation number for the week ended October 18 this year was revised upwards by 14 basis points to 10.82 per cent as against provisional estimate of 10.68 per cent. The final numbers are released two months after the provisional estimate.