Recent Cenvat rate cut will lead to a general reduction in price levels.
The Reserve Bank of India (RBI) today said softening of international commodity prices is expected to result in further downward pressure on domestic prices.
Lower pressure on inflation seemed to be the only good news in the Macroeconomic and Monetary Developments report ahead of the RBI’s third quarter review tomorrow. The report said that crude oil prices are expected to be lower this year than what they were in 2008, when they touched an all-time high of $147 a barrel due to weaker demand across the OECD (Organisation for Economic Co-operation and Development) countries and the prolonged global economic downturn.
|DRIVERS OF PRICE CHANGE
Key commodity price inflation (%)
||Global (Dec 08*)
|Basic metals, alloys
Iron and steel
|* Change over Dec ‘07
** Based on wholesale price index as on Jan 10, 2009
# Represented by IMF metals price index, which covers copper,
aluminium, iron ore, tin, nickel, zinc, lead and uranium.
Lower global prices will augur well for Indian consumers, oil marketing companies and government finances. With the oil marketing companies unable to fully pass on the benefits of higher global crude oil prices, the government has been forced to issue special bonds to partly subsidise their sales.
In addition, a moderation in aggregate demand on account of the expected slowdown is expected to further lower the upside risks to inflation in coming months. “Following the international trend, prices of manufacturing products are expected to moderate. In addition, the pass-through of recent reduction in the Cenvat rate by 4 per cent by the government of India as part of the fiscal stimulus package would lead to a general reduction in price levels,” the report said.
But the central bank has warned of upside risks to the prices of food, oilseeds, sugar and cotton on account of a shortfall in output, according to the first advance estimates of kharif production for 2008-09. “Easing international prices, however, along with improved rabi sowing could eventually balance these risks,” the report added.
Driven by stiff correction of key commodity prices, year-on-year (y-o-y) headline inflation showed a sharp correction from a peak of 12.9 per cent on August 2, 2008, to 5.6 per cent for the-week ended January 10, 2009. “The recent decline in WPI inflation was driven by a decline in prices of minerals, oil, iron and steel, oilseeds, edible oils, oil cakes, raw cotton,” the report said.
Even at the present level, inflation is above the RBI’s comfort level of 5-5.5 per cent. But with a further round of reduction in auto and cooking fuel prices expected in the weeks before the general elections, economists expect inflation to fall further. The third quarter (October-December) witnessed fuel group inflation turning negative to -1.30 per cent during the week ended January 10, as against an intra-year peak of 18 per cent on August 2, 2008.
“This reflected the reduction in the price of petrol by Rs 5 per litre and diesel by Rs 2 per litre effective December 6, 2008, as well as a decline in the prices of freely priced petroleum products in the range of 30-65 per cent since August 2008,” the report said.
With the increase in prices of sugar, edible oils/oil cakes, textiles, chemicals, iron and steel and machinery and machine tools manufactured products, inflation increased to 5.9 per cent on January 10, compared with 4.6 per cent a year ago. However, it came down sharply from its peak of 11.9 per cent in mid-August 2008.
However, increase in the prices of food articles, especially of wheat, fruits, milk, eggs, fish and meat as well as non-food articles such as oilseeds and raw cotton, saw primary articles inflation (y-o-y) rise to 11.6 per cent on January 10, from 4.5 per cent a year ago (it was 9.7 per cent at end-March 2008).
“Inflation, based on year-on-year variation in consumer price indices (CPIs), increased further during November-December 2008 mainly due to increase in the prices of food, fuel and services (represented by the ‘miscellaneous’ group). During the period, various measures of consumer price inflation were placed in the range of 10.4-11.1 per cent as compared with 7.3-8.8 per cent in June 2008 and 5.1- 6.2 per cent in November 2007,” the report said.