The sharp fall in global commodity prices restricted inflation in January. Contrary to expectations, the Wholesale Price Index (WPI) declined for an eighth month, ending in negative territory. For January, the WPI contracted 0.4 per cent, compared to a 5.1 per cent increase in the corresponding period last year. Prices of manufactured products, primary articles and fuel continued to decline during the month. With the Consumer Price Index at 5.11 per cent and the WPI at -0.4 per cent in January, the Reserve Bank of India will have the much-needed room to cut rates in the coming months. Economists believe disinflationary pressures continue to sustain, which will enable the central bank to ease more aggressively than anticipated.
The weak print for January has been driven by a sharp fall in crude prices. Fuel inflation has gone into negative territory. While the fall in fuel prices is a major contributor, prices of food and manufactured goods have also fallen. The sharp fall in global commodity prices has driven the cost of manufactured products down to 1.1 per cent from three per cent a year ago. After December, economists had expected food prices would rebound, but that didn’t happen. Data show the prices of primary articles declined to 3.3 per cent in January from 6.8 per cent last year, while prices of food articles fell to eight per cent from 8.8 per cent. Fruit, milk and pulses continued to show relatively high increases in prices.
Most economists expect two rate cuts of 25 basis points till June. HSBC Global Research believes RBI will be mindful of these readings as it awaits a prudent Budget from the government. Indranil Sen Gupta of Bank of America Merrill Lynch says: “We expect (RBI) Governor Rajan to cut the policy rate 25 basis points on April 7 (and June) with the Budget meeting his pre-condition of fiscal consolidation and inflation set on his six per cent January 2016 target.” Any rate action after June is unlikely, as the US Federal Reserve is expected to raise rates from September.