Economists and analysts expect further fall of key policy rates with the headline inflation rate for the week ended December 6 dropping to a nine-month low of 6.84 per cent, below the Reserve Bank of India’s (RBI’s) target of 7 per cent for 2008-09.
Data released by the commerce and industry ministry today showed that the inflation rate for the week under consideration fell sharply from 8 per cent in the previous week, driven mainly by the cut in fuel prices. The rate, however, was higher than the 3.84 per cent in the same week last year.
This is the sixth consecutive week of single-digit inflation. Headline inflation, however, remains higher than the central bank’s “comfort level” of 5 to 5.5 per cent.
“The sharp decline in the inflation rate was primarily bought about by reduction in prices of petrol and diesel during the week under consideration. Moreover, the restricted monetary policy seems to be helping in this decline,” said Soumendra Dash, chief economist, CARE Ratings.
The inflation rate for the fuel group, which has a weight of 14.23 per cent in the index, declined to 0.57 per cent from 4.48 per cent in the previous week. The government had slashed prices of petrol by Rs 5 and diesel by Rs 2 on December 5 in the backdrop of falling crude oil prices, which have declined by more than 73 per cent from their record high of $147.27 a barrel on July 11.
The inflation rate for primary articles, which have a weight of 22 per cent in the index, increased 11.8 per cent in the reported week, against 11.66 per cent in the previous week. However, the inflation rate for food articles decreased marginally 10.18 per cent in the seven days up to December 6, 2008, compared with 10.52 per cent in the previous week.
Inflation for manufactured goods, which constitute about 64 per cent of the WPI basket, marginally declined to 7.31 per cent from 7.85 per cent in the previous week.
The inflation number for the week ended October 11, 2008, has been revised upward by 27 basis points to 11.3 per cent. The provisional numbers are revised after a gap of two months.
Rate cuts expected:
Economists expect the RBI, which has cut its benchmark lending rate by 2.5 percentage points since October 20 to 6.5 per cent, is likely to further ease the monetary policy in order to boost demand. The central bank is scheduled to review the monetary policy next month.
“We expect monetary and fiscal policy responses to continue. We expect a second fiscal stimulus package and are pencilling in a 250-basis-point cut in the cash reserve ratio (CRR) to 3 per cent, a 150-basis-point cut in the repo rate to 5 per cent and a 100-basis-point cut in the reverse repo rate to 4 per cent, all by mid-2009,” said a release by Nomura Financial Advisory and Securities.
“The current economic conditions are conducive for policy-easing,” said Saugata Bhattacharya, vice-president, Axis Bank. According to Dash, the RBI is likely to ease lending rates by at least 100 basis points by mid-January next year.
Manufactured products resisting decline seen since August:
The fall in the inflation rate in the weeks after August has been attributed to fall in prices of commodities, including crude oil. But economists remain puzzled by the factors that resisted this decline in the period.
“The steady decline in headline inflation could be attributed to falling crude oil prices and the restrictive monetary measures that the government has undertaken. But the manufactured products basket seems to mostly buck this trend in the period after October. This has happened at a time demand in the economy is waning, which should have resulted in a sharper decline in prices of manufactured products. I expect this decline to be seen in the coming weeks,” said Dash.
