India's wholesale prices dropped for the tenth consecutive month, while retail inflation remained at benign level, raising prospects of an interest rate cut when the Reserve Bank of India (RBI) reviews monetary policy later this month. The annual rate of inflation, based on wholesale price index, stood at -4.95% in August, compared to -4.05% for the previous month and 3.85% during the corresponding month of the previous year. The sharp slide in global crude oil prices and vegetable prices contributed significantly to the dip in wholesale price pressures.
Separate data showed that the retail inflation in August rose an annual 3.66% compared to the previous month's 3.69%, well below RBI's comfort level. Food and beverages inflation stood at 2.9% in August, sharply below the double digit levels seen in the past. However, prices of pulses and some vegetables remain areas of concern.
The continued decline in wholesale prices has triggered a debate on deflation, with the government calling for a sharp reduction in interest rate to boost growth. While RBI said it has not yet done with rate cuts, it has preferred to urge caution due to the lurking inflationary pressures. RBI will review monetary policy on September 29 and expectations are rising that it may go for a rate cut.
Finance minister Arun Jaitley said core wholesale inflation (excluding food and fuels) decelerated to 4.1% in August 2015 from 4.3% in July 2015 and thereby, continuing the momentum of decelerating core inflation. He said both categories of inflation indicate that they are moderating and under control.
Economists said they expect the central bank to reduce rate against the backdrop of soft inflation. “The subdued extent of the pick-up in food inflation in August 2015 relative to the previous month despite the considerable worsening of monsoon dynamics, as well as the drop in core CPI inflation, are encouraging,” said Aditi Nayar, senior economist at ratings agency ICRA.
India Inc stepped up calls for a sharp reduction in interest rate. “Given that CPI inflation has also been declining, the RBI needs to reduce interest rates sharply to drive a recovery in demand. We expect the Reserve Bank to reduce interest rates by 50 basis points in the forthcoming policy with statements supporting further easing in the near future,” said Chandrajit Banerjee, director general at CII.
