Inflation falls to two-year low at 3.52%

In spite of rising prices of both primary articles and manufactured products, inflation based on the wholesale price index fell to 3.52%, a two-year low, for the week ended September 1, from 3.79% a week before. Last year, during the same week, inflation stood at 5.34%.

The data prompted some expectations that the central bank could ease key interest rates at its next review of monetary policy scheduled for October 30.

However, the previously announced inflation rate for the week ended July 20 was revised upwards to 4.61%, up from the provisional figure of 4.27%.

The primary articles group in the index rose by 1.3%, while manufactured items index increased by 0.2% over the previous week. The fuel group saw a 0.1% decline.

"The current fall in inflation is due to base effect. However, higher foodgrain prices and increasing crude oil prices remain a threat to inflation," Arun Kaul, general manager (treasury), Punjab National Bank said.

Crude oil prices increased to a record high above $80 a barrel this week. Auto fuel prices were last raised in June 2006.

Data released on Wednesday showed that industrial production grew at 7.1%, its slowest since October last year. Commerce and industry minister Kamal Nath blamed the credit squeeze by the Reserve Bank of India as the reason for the lacklustre performance on the industrial growth front.

However, analysts do not feel the central bank would ease its tighter monetary policy on its October 30 monetary policy review. "RBI may continue its tighter monetary policy stance. However, the market is closely watching the US rates," Kaul said.

The RBI has raised interest rates five times since mid-2006, most recently in March. At a July policy review, it held rates steady but raised cash reserve ratio for banks by 50 basis points to 7% to squeeze liquidity from the economy.

On the fiscal policy front, the government has banned export of pulses wheat, skimmed milk powder to curb price rises. It has also reduced customs duties on wheat, maize, pulses to zero level.