India is still not threatened by deflation: Moody's

 India is not threatened by a deflation spiral that could derail economic development, the economic intelligence arm of global rating agency Moody’s said on Thursday.
“Deflation is generally unwelcome by policymakers as it encourages consumers to delay purchases and businesses to postpone investment, which would eventually hurt GDP growth,” Sherman Chan, an economist with Moody’s said.

Boost for infrastructure
“Lower prices may in fact boost consumption volumes, especially in poor regions. Meanwhile, cheaper input costs may also present a good opportunity to speed up construction of much needed infrastructure,” Chan addded.
For the first time since the new wholesale price index (WPI) series started in 1995, India’s annual rate of inflation has turned negative, falling to minus 1.61 per cent for the week ended June 6 2009. This has led to fears that this would lead to hoarding of food articles and a consequent rise in prices.

The inflation rate, which was 0.13 per cent in the previous week, had last turned negative in 1977.

Decline inevitable
Chan said the year-on-year decline of the WPI “is indeed inevitable”, and attributed this to a high base effect due to the increase in oil and food prices last year.
However, according to the Moody’s economist, actual loss to the economy will depend on a range of factors like lower-than-expected rainfall that will impact agricultural output and thus on rural household incomes.

“Falling agricultural output will also put upward pressure on food prices, helping to stop the contraction in the WPI. Moreover, the recent ‘green shoots’ observed in various economies have fuelled market optimism and pushed global commodity prices higher. Amid price controls, Indian oil companies have been operating at a loss,” Moody’s said. Higher fuel prices will help to pull the WPI back to positive territory by year-end.

No change in policy
Chan ruled out any change in the monetary policy stance of the Reserve Bank of India due to weak price data in recent weeks. “The central bank is expected to maintain a neutral stance for now, amid signs that the Indian economy has already hit its trough and the need for further rate cuts has softened,” Moody’s added.

India’s economic outlook still hinges on developments in the US. Moody’s said the American economy will bottom out in October, and India can expect to embark on a recovery path only in 2010.

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