Inflation drops to five-year low, rate cut chorus grows louder

The inflation for August was revised upwards to 3.85 per cent from 3.74 per cent earlier.

By: ENS Economic Bureau | New Delhi | Published: November 15, 2014 12:49:37 am

The wholesale price index-based inflation dropped for the fifth straight month to 1.77 per cent in October, the lowest in more than five-years on the back of softening food and fuel prices.

This will intensify pressure on the Reserve Bank of India (RBI) to cut interest rates to boost investment, more so as it follows the retail inflation that cooled down further to an all-time low of 5.52 per cent during the month, its lowest since the government started computing the data in 2012.

The factory output had also posted a moderate growth of 2.5 per cent in September after recording almost-flat growth in the previous two months.

The wholesale price index (WPI), released by the commerce and industry department, was seen slowest in September 2009. It was 2.38 per cent in September 2014 while the WPI during April-October stood at 2 per cent. The inflation for August was revised upwards to 3.85 per cent from 3.74 per cent earlier.

Enthused by the decline in twin inflation, corporates have escalated their demands for slashing key interest rates in the upcoming bi-monthly monetary policy review by RBI on December 2. The central bank has kept the rates unchanged since January this year despite the pressure. It has been targeting the retail inflation, which has moderated significantly. However, economists believe that the RBI will hold the rates and may take an action only later.

“This turned out to be a broad-based softening… Softer food prices and a favourable base would further push down the November inflation figure. Deflation is also possible, albeit with low probability. We reckon, however, that the RBI, at its December policy meet, will wait-and-watch, and cut rates at the next policy meeting,” a report by Anand Rathi Institutional Research said.

The report explained that the slowing non-core inflation has played a large role easing the headline inflation. “Moreover, the global deflationary environment and subdued domestic demand should put further downward pressure on inflation,” it said adding that as the economy will start recovering, core inflation will begin hardening again.

During the month, the fuel and power index declined by 1.3 per cent as prices of furnace oil, ATF, petrol, kerosene and high speed diesel oil dropped on account of international crude prices coming down.

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