Hopeful signs
“The recent fall in food prices has helped.”
After a long time there are signs of weakening of the inflationary momentum in the economy. The figures released earlier this week show that the wholesale price index, which is India’s inflation indicator, fell to a two-year low of 7.4 per cent in December compared to 9.7 per cent in November.
Inflation had touched double digits in September, causing all-round worry. Though the stubborn 9 per cent level, where it had ruled for months, has now been broken, there is still no comfort on the price front and it may be too early to celebrate. It was expected that the price index would ease after the highs of recent months and there was even a consensus on the degree of decline.
The moderation was caused by the fall in food prices which accounts for a sixth of the wholesale price index. Food inflation fell by close to 8 percentage points in a month’s time and that has been reflected in the price index. Apart from this there was some base effect also because in the corresponding month of last year inflation had ruled at 9.45 per cent. It is also important to note that core inflation, which indicates the rate of price rise in manufactured products, has not slowed down much. There was only a marginal decline from 7.96 per cent in November to 7.72 per cent in December. There is a chance that things can get worse too. Food inflation may again rise in the next two months. The big revenue deficit is certain to stoke an all-round price increase. The depreciation of the rupee is yet another unfavourable factor since oil imports will be costlier. Finance minister Pranab Mukherjee has said that the volatility of international prices is making the situation more difficult.
Any policy corrective action at the moment has to come from the Reserve Bank only. It had indicated last month that it may loosen its monetary stance. It is true that the apex bank has got greater flexibility of action now but it will be unrealistic to expect any immediate reduction in policy rates in the forthcoming review next week. It may maintain the present repo rate till the time it sees a substantial and consistent downtrend in the price index, though there are expectations of a cut in the cash reserve ratio.
