Broad-based fall in wholesale inflation

In September, Wholesale Price Index (WPI)-based inflation fell to 2.38 per cent, the lowest in about five years, owing to a broad-based decline in all sub-indices. The sharpest fall was seen in the food and fuel segments.

Primary food inflation fell by 1.7 percentage points to 2.2 per cent due to a fall in inflation for vegetables (10 percentage points), and egg, meat & fish. Fuel inflation declined three percentage points to 1.3 per cent, as petrol prices fell and electricity prices rose at a slower pace. In September, petrol prices were reduced due to a decline in crude oil prices, while electricity prices rose only marginally, the result of a high base.

Core inflation, an indicator of demand-side pressure on prices, also declined in September. Non-food manufacturing inflation, the Reserve Bank of India (RBI)'s measure of core inflation, fell to 2.8 per cent from 3.5 per cent in August. Inflation for textiles, leather, chemicals, basic metals and transport & equipment saw the steepest decline. However, a rise in inflation for beverages, tobacco, and non-metallic mineral products (together accounting for seven per cent of manufactured products) offset some of the decline.

The CRISIL Core Inflation Indicator (CCII), an alternative measure of core inflation (calculated by removing metal prices from those of manufactured articles), stood at three per cent in September; this was a tad higher than RBI's measure of core inflation. The reason metals are excluded from the CCII is metal prices are usually determined by changing global demand-supply dynamics and volatility in the exchange rate, not domestic conditions alone.

In September, inflation for basic metals fell to 1.3 per cent from 2.1 per cent in August, with ferrous metals inflation easing from 2.4 per cent to 1.7 per cent. As the downward pressure from metals isn't captured in the CCII, core inflation, as measured by this mechanism, was higher than that captured through the non-food manufacturing index.

Also, unlike RBI's measure of core inflation, the CCII includes manufactured or processed food prices, as these reflect the second-round impact of inflation in primary food articles and, therefore, capture domestic demand-side pressures in the economy. As inflation for primary food articles fell sharply and demand continued to remain fragile, manufacturers of food articles seemed to have passed on the falling costs to consumers. Consequently, inflation for manufactured food products fell to three per cent from 3.4 per cent in August. This resulted in a decline in the CCII, which stood at 3.6 per cent in August.

Any upside to the CCII will be capped, as an economic recovery remains fragile and the monsoon recovered in August and September, moderating the risks of a rise in food inflation. Despite this, we do not expect a repo rate cut in the remaining part of this financial year. RBI's focus has now shifted towards sustainably achieving its Consumer Price Index (CPI)-based inflation target of six per cent by 2016. In September, CPI inflation fell to 6.5 per cent from 7.8 per cent in August.