Inflation falls to 8.98%, unexpectedly

Headline inflation, as measured by the wholesale price index (WPI), fell sharply to 8.98 per cent for the week ended November 1 from 10.72 per cent in the previous week. After five months, inflation is back in single digit, which economists said will give the Reserve Bank of India room to cut rates.

The sharp decline of 1.74 percentage points is on account of a significant fall in the prices of fuel, mineral oil as well as manufactured products like steel. Also, the index for the corresponding week last year was high. “The index number had risen sharply in the same week last year. This made the base higher and as a result the latest inflation rate is low. It would not be a surprise if the inflation rate goes over 9 per cent next week (November 8),” Saumitra Chaudhuri, member, Prime Minister’s economic advisory council, said.

Still, most economists were taken by surprise at the latest fall. “The speed at which inflation has come down has surprised us,” said Dharmakirti Joshi, economist, Crisil Ltd, a ratings and advisory firm.

The fuel group, which has nearly 15 per cent weight in WPI, contributed the most to the fall. Prices of non-sensitive fuel products like naphtha and aviation turbine fuel, whose prices are not regulated, fell 33 per cent and 18 per cent, respectively, mirroring the global crude oil prices.

However, the inflation rate of 30 essential commodities, which are closely watched by the government, rose 7.74 per cent for the week under review, up from 7.51 per cent reported in the earlier week. Higher wholesale prices of food articles like rice, potatoes and bajra have contributed to the latest increase.

Economists now expect RBI to further cut key interest rates to boost economic growth. “The drop in the inflation rate makes it comfortable for RBI to reduce the interest rate”, said Chaudhuri. According to him, the inflation rate will come down to between 8 per cent and 8.5 per cent by December 2008.

RBI, in its mid-term review of monetary policy, had said that the inflation rate will come down to 7 per cent by March 31, 2009 to 8.06 per cent, as compared to 9.09 per cent in the previous week. Twenty three products including steel sheets & plates, imported & unrefined edible oils and PVC pipes & tubes fell during the week ended November 1, 2008.

In the case of primary articles group, inflation rate fell by 40 basis points (one basis point is one-hundredth of a percentage point) to 11.01 per cent for the week ended November 1, 2008. However, it is the commodity group ‘fuel and power’ which fell the most. The inflation rate fell sharply to 9.22 per cent in the current week as compared to 14.09 per cent in the previous week.