Low inflation calls for policy rate cut

The country may be headed for a more benign inflation regime if the recent behaviour of the prices is an indicator.

Both the indices – the Consumer Price Index (CPI), released last week,  and the Wholesale Price Index (WPI,) released on Monday – have shown a sharp decline, which may be a sign of deflationary trends gaining strength in the economy. The CPI-based inflation was only 4.4 per cent in November, as against a high 11.2 per cent in November last year.

The WPI-based inflation showed a much more remarkable slide. The rate for November was zero, dramatically dropping from the 7.5 per cent of last November. This has not happened at any time since 1982 and the WPI inflation is the lowest in the last five years. The steep fall in the indices in such a short time has been a matter of surprise, though a  downtrend was in evidence. 

What triggered the major fall in both indices was the sharp fall in the crude oil prices which are near half of what they were a few months ago. Fuel prices fell over 5 per cent compared to the previous month. Since fuel and power have a high weightage of about 15 per cent in the index, the impact was substantial.

Food inflation which had been driving the indices up for many years has also started declining. It was over 15 per cent in November last year, but has come down to over 3 per cent now. The fall is more spectacular in terms of whole sale prices which showed a drop in food inflation to 0.6 per cent from 19.7 per cent last year. The indices have even showed that some items in the food basket, like vegetables, have witnessed a fall in price.

While the common man is yet to feel that the fall in prices is real, the declining inflation rate is likely to have its echo on policy formulation. The most obvious reaction is a stronger demand for an interest rate cut by the Reserve Bank of India. It is likely that the RBI’s inflation targets would be achieved well before time. An additional reason for a policy rate cut would be the sharp fall in industrial production data for October.

The argument is likely to be that a rate cut is not only safe now but is even required. RBI governor  Raghuram Rajan has said that he is ready for even a mid-term cut. But he is likely to wait for surer signs of a confirmed trend of low inflation before acting on the policy front.

Narendra Modi or Rahul Gandhi? Who will win the battle royale of the Lok Sabha Elections 2019


Get real-time news updates, views and analysis on Lok Sabha Elections 2019 on Deccanherald.com/news/lok-sabha-elections-2019 


Like us on Facebook or follow us on Twitter and Instagram with #DHPoliticalTheatre for live updates on the Indian general elections 2019.

Liked the story?

  • 0

    Happy
  • 0

    Amused
  • 0

    Sad
  • 0

    Frustrated
  • 0

    Angry