You are here: Home » Opinion » Financial X-Ray
Business Standard

WPI in negative zone, 50 bps rate cut likely by June

Prices of food, fuel, manufactured goods dip; retail inflation to follow

Malini Bhupta 

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.

With pricing pressure easing on producers, thanks to lower oil and commodity prices, the retail inflation print will also ease well below targeted levels. While the central bank’s attention might have shifted to retail inflation, economists believe it is important to keep an eye on WPI, as this captures the broadest range of manufactured products and gives a sense of pricing pressure on producers. The absence of price pressures at the producer level should eventually lead to weaker inflation at the retail level; therefore, expect CPI inflation to remain range-bound at five per cent levels.

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.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, February 16 2015. 21:36 IST