Inflation at 5.07%

Inflation rate fell to a nearly one-year low of 5.07% for the week ended January 24, after increasing for two consecutive weeks due to truckers’ strike.

With overall demand in the economy slowing down, experts say the wholesale price inflation will continue its downward journey. They expect India’s central bank to cut interest rates to boost economic activity.

Fall in prices of primary articles and manufactured products contributed to the fall in inflation rate, while fuel index, which has a weight of 14 per cent in the index, went up due to increase in prices of naphtha, furnace oil and light diesel oil. “The inflation number will be more subdued in 2009. I don’t see it as a threat,” said Subir Gokarn, economist with Standard & Poor’s, an international ratings firm. He expects inflation to cool down further to 3 per cent by March 2009, as predicted by the Reserve Bank of India (RBI).

An inflation rate of around 5 per cent is RBI’s comfort zone. A higher level of inflation in 2008 forced the central bank to hike interest rates to dampen excess demand in the economy.

With price increase no longer posing a threat, economists expect RBI to announce a further cut in key interest rates like repo (the rate at which it lends to banks) and reverse repo (the rate at which RBI sucks liquidity from the market). Gokarn, while presenting the Asia-Pacific Macroeconomic Outlook, said he expected a 1 percentage point cut in both repo and reverse repo between now and April 2009. S&P predicts Indian economy to grow between 5.8- 6.3 per cent in calendar year 2009, as against an estimated growth of 6.5-7 per cent in calendar 2008.

In primary articles, the rate of inflation declined to 9 per cent as against 11 per cent in the previous week. However, food price inflation is still in at the double-digit mark at 11.1 per cent as against 11.2 per cent last week.

In manufactured products, inflation rate decreased from 6.2 per cent last week to 5.7 per cent in the current week. In terms of contribution, primary articles with a weight of 22 per cent in the index contributed 41 per cent to the headline inflation, while manufactured products accounted for 62 per cent.

Meanwhile, the final inflation number for week ended December 11 was revised downwards to 7.86 per cent as against the provisional estimate of 8 per cent released two months back.