Inflation-based on wholesale prices eased to a four-month low of 4.53 per cent in August on softening of food prices, but experts warned that a sliding rupee and rising oil prices could prompt an interest rate hike by RBI.
The effect of rising petrol and diesel prices has been neutralised by deflation in food articles, which resulted a lower wholesale price index (WPI) inflation for August.
The WPI-based inflation stood at 5.09 per cent in July and 3.24 per cent in August last year.
According to government data released Friday, food articles registered deflation at 4.04 per cent in August 2018. Last month, deflation in this category was 2.16 per cent.
Deflation in vegetables was 20.18 per cent in August, as against 14.07 per cent in the previous month.
While inflation in liquefied petroleum gas (LPG) was 46.08 per cent, in diesel and petrol it was 19.90 per cent and 16.30 per cent, respectively, during August.
ICRA Principal Economist Aditi Nayar said core inflation hardened to a series high 5 per cent in August, from 4.8 per cent in July, a signal that firms with pricing power are beginning to transmit the weaker rupee and rising costs associated with industrial inputs such as fuels, to final prices.
"The rise in the core-WPI inflation in August 2018, in addition to the risks posed to the outlook for the CPI inflation by the INR depreciation, elevated crude oil prices and revision in MSPs, appear likely to prompt a majority of the MPC members to vote for a rate hike in the October 2018 policy meeting," Nayar said.
RBI's fourth bi-monthly policy review is slated on October 5.
"The decline in the inflation reading, which is in line with the RBI's medium-term inflation target, should induce the RBI to resume the accommodative policy stance to support the incipient recovery currently underway in the economy which in turn would trigger the investment cycle by lowering the borrowing costs of industry," CII Director General Chandrajit Banerjee said.
During August, among food articles, potato inflation continued to rule high at 71.89 per cent, while onion and fruits witnessed deflation of 26.80 per cent and 16.40 per cent, respectively.
Deflation continued in pulses at 14.23 per cent in August.
The 4.53 per cent inflation is the lowest in four months, and a lower inflation than this level was last seen in April at 3.62 per cent.
As per the data, the WPI inflation for June was revised downwards to 5.68 per cent from the provisional estimate of 5.77 per cent.
Brent crude oil price is hovering at around USD 79 a barrel. This, along with a depreciating rupee has increased the oil import bill, thereby making petrol and diesel costlier.
Rupee has depreciated over 12 per cent since the beginning of 2018 and is currently trading around 71.90 to a dollar.
Petrol price Thursday climbed to an all-time high of Rs 81 per litre in Delhi, while in Mumbai it inched up to Rs 88.39. A litre of diesel in the national capital was priced at Rs 73.08 and Rs 77.58 in Mumbai.
In its third monetary policy review for the fiscal, the Reserve Bank last month hiked interest rate by 0.25 per cent to 6.5 per cent on inflationary concerns.
For July-September, RBI pegged CPI-based retail inflation at 4.2 per cent, which it saw firming up to 4.8 per cent in the second half of the current fiscal.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)