The Consumer Price Index (CPI) for September, published on Monday, indicated a sharp decline in inflation. The headline number was 6.46 per cent, more than a percentage point down from the August number and far below the 9.84 per cent recorded a year ago. More importantly, food inflation for September was a surprisingly benign 7.67 per cent, compared to over eight per cent in August and almost 12 per cent last year — surprising because this moderation took place in a bad-monsoon year. Food is a major part of the inflation story now. Actions such as the open-market sales of rice and wheat from the buffer stock, putting a lid on procurement prices and discouraging states from offering additional incentives to farmers for these crops have apparently had an immediate impact on food inflation. Of course, these need to be reinforced by several structural reforms, but the immediate dividends are both significant and very welcome. The other significant development over the past few weeks, of course, is the dramatic drop in crude oil prices. There is a triple benefit from this; less pressure on the current account, a significant reduction in the subsidy bill, which eases the fiscal situation, and, of course, a lowering of inflationary pressures.
The Wholesale Price Index (WPI) for September was published on Tuesday. It also indicates a significant easing of inflation, coming in at 2.38 per cent, compared with over seven per cent a year ago. To emphasise the turn in the food story, rice prices increased by 6.87 per cent year-on-year in September 2014; a year before, they had increased by over 18 per cent! The WPI is, of course, much more sensitive to oil and other commodity prices than the CPI; as a result of falling oil prices, the fuel segment of the index showed a year-on-year increase of a mere 1.33 per cent, compared with the almost 12 per cent increase one year ago. Importantly, the rate of increase in the prices of manufactured goods was slightly higher this year (2.8 per cent) than in the previous one (2.4 per cent), implying that producers’ margins will respond positively to the benign commodity-price scenario. This is a positive development as far as a potential recovery in the investment cycle is concerned.
The indices clearly indicate the increasing space being created for a turn in the interest-rate cycle. In terms of the prevailing policy framework, a key indicator to watch out for is how these developments impact inflationary expectations. The next Reserve Bank of India (RBI) quarterly survey of households will reveal whether people perceive these movements to be transient or more enduring. This will impact the RBI’s judgement about timing the interest-rate cut. Meanwhile, though, the narrowing of both fiscal and current-account deficits should contribute to a softening of long-term interest rates, a de facto monetary easing, and a much more stable currency. Pessimism about the global economic condition from the International Monetary Fund notwithstanding, the overall macroeconomic situation in India looks a lot healthier than it has for years. The main thing to guard against in this situation is complacency. Governments are prone to avoiding difficult structural reforms in situations of macroeconomic stability. In India’s case, this could spell disaster.
