Encouraging drop in inflation rate

There is good news on the inflation front with the Consumer Price Index (CPI) figures showing a remarkable decline to 6.46 per cent in September.

In August, it was 7.73 per cent. It also shows a sharp drop from the 9.84 per cent of the same month last year. It is the lowest inflation figure since the beginning of the new CPI series about three years ago and is the fourth consecutive monthly rate below 8 per cent. The Wholesale Price Index (WPI) for September is also line with the CPI trend. The WPI number, in fact, shows a more dramatic fall from over 7 per cent last year to 2.38 per cent. WPI is at a six-year low.  Some features of the falling rates are especially encouraging. Food inflation was the most significant part of the overall price rise in the past. It has shown signs of easing now, though the deficient monsoon in some parts of the country had affected crop yields. 

Both local and global factors have contributed to the new price situation. Crude prices have fallen to levels of $ 85 per barrel from about $ 105 three months ago. This is because of a continuing slowdown in Europe, greater availability of shale gas in the US and increased supplies from West Asia. The fall in crude price has an impact on the country’s POL (petroleum, oils and lubricants) prices which influence the general price level, especially food prices. The worldwide fall in commodity prices was another factor. Local factors also played a part.  The open market sales of rice and wheat from the FCI godowns helped to keep the prices of two major food grains in check.  

It has been noted that the latest inflation figures are close to the targets set by the Reserve Bank of India. The RBI has declared that its aim is to bring inflation down to 8 per cent by January 2015 and 6 per cent by January 2016. It is possible that the present moderation in prices might lead to achievement of targets even before the dates set for them. But the RBI is only likely to wait and watch before easing the interest rates. There are still some uncertainties which may have to be tackled. Shortfalls in kharif production may fuel food inflation again. Though Reserve Bank governor Raghuram Rajan has said that India is well prepared for an end to the US monetary stimulus programme, he may wait for its actual impact. So an easing of policy rates is unlikely in the near future.