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Inflation based on wholesale prices is expected to moderate further in the months ahead and is expected to average 1.5 per cent this year, says a Nomura report.
According to the Japanese financial services major, despite adverse base effects the Wholesale Price Index-based inflation is set to moderate further on account of lower food prices and still weak pricing power of firms.
"In the months ahead, we expect WPI inflation to moderate further despite adverse base effects due to lower food prices (sowing progress and good supply management by the government) and still weak pricing power of firms," Nomura said in a research note.
In its base case, Nomura expects WPI inflation to average 1.5 per cent in 2016 as against (-)2.7 per cent in 2015.
Reversing its 7-month uptrend, wholesale inflation eased to 3.57 per cent in September, as good monsoon helped cool food prices. In September 2015, WPI inflation was (-)4.59 per cent. In August this year it stood at 3.74 per cent.
"The positive WPI inflation surprise was mainly driven by a sharp moderation in food prices, while core WPI inflation was unchanged," Nomura said.
While pressure on manufacturing firms' profits likely rose due to an increase in fuel and metal prices in September. Output prices rose, but "barley", suggesting that pricing power remains weak.
"Despite adverse base effects, WPI inflation may moderate further in the coming months due to cooling food prices," the report said.
The fall in WPI inflation prompted the industry to demand interest rate cut to boost economic activity.
Meanwhile, the RBI Governor Urjit Patel this month cut benchmark interest rates by 0.25 per cent to 6.25 per cent.