Inflation finally below 5%

But Reserve Bank unlikely to soften stance on monetary tightening.

Driven by a fall in prices of food articles, the wholesale price index based inflation fell to an eight-month low of 4.85 per cent for the week ended 26 May, 2007, from 5.06 per cent in the previous week. The last time the inflation rate fell below 5 per cent was in the week ended 23 September, 2006 (at 4.77 per cent).

This brings inflation below the Reserve Bank of India's target of around 5 per cent for the fiscal year.

As in earlier weeks, the higher base effect also contributed in bringing down inflation "" the index fell 20 basis points to 211.7 for the week under review, from 211.9 in the previous week. During the same week last year, the index had increased 20 basis points.

"The fall in inflation is on expected lines. It is due to the base effect. The steps taken by the government and the Reserve Bank of India have also started showing results," said Arun Kaul, general manager-treasury, Punjab National Bank.

Kaul said that while it was difficult to predict an inflation level for 2007-08, "I do not see any reason why it cannot be brought under the 4-4.5 per cent medium term target that the RBI has set."

However, the threat of inflationary spikes is not completely over. "The higher level of inflation last year was mainly due to increasing prices of primary articles, caused by supply side constraints. As long as the supply side problem is not fixed, the threat of high levels of inflation will remain," Kaul said.

Analysts also feel that despite the encouraging decline in inflation, the RBI may not soften its current stance on monetary tightening.

"The external environment is not conducive for a soft interest rate regime in India. Hence, I do not think the RBI will soften its stand. Whether it will further pursue its tight monetary policy is difficult to say," says Kaul.

The primary articles commodity group, which has a 22 per cent weight in the WPI basket, saw a decline of 0.3 per cent over the previous week.

The decline was driven by lower prices of food articles like fruit and vegetables, barley, urad, bajra, condiments and spices, arhar and gram. Among non-food articles, prices of sunflower, copra, groundnut seed and cotton seed declined, whereas prices of raw rubber and raw cotton increased.