Headline inflation in July contracted to a decade-low of -4.05 per cent on back of lower food and fuel prices, raising the clamour for a reduction in key interest rate by the Reserve Bank of India. The data prompted the government, which is already armed with moderating retail inflation and a growing factory output, to claim that economy has stabilised and a “significant improvement” can be expected during the current fiscal. This is the steepest fall since 2005.
According to the data released by the government, headline inflation, as gauged by the Wholesale Price Index (WPI), fell sharply due to moderating food prices, which declined 1.16 per cent and fuel and power registering a steep contraction of 12.81 per cent during the month. WPI during July 2014 stood at 5.41 per cent. It been in the negative zone since November 2014.
Reacting to the development, finance minister Arun Jaitley said, “(it is a ) Very positive sign and, obviously, along with other important data which has come out, speaks of stability in the economy. Inflation is under control. Manufacturing and index of industrial production (IIP) figures are quite encouraging. The indirect tax figures are quite encouraging. Both the time-table and geographical spread of the monsoon is quite good. Expect a significant improvement this year”. He added that later during the year, these developments will also impact rural purchasing power. The headline inflation number reflects the global movement in commodity prices, which are apprehended to reach a 13-year low, exceeding the low reached during the financial meltdown of 2008. The S&P GSCI index, which is a measure of 24 commodities, lost 14 per cent of its value last month. Buoyed by the data, industry made a strong pitch for the central bank to cut interest rate ahead of its September 29 review. “The distinct downturn in both retail and headline inflation… make a strong case for RBI to resume its accommodative policy stance and reduce interest rates even before the next monetary policy,” Chandrajit Banerjee, director general, CII, said adding that inflation is unlikely to move up during the year. RBI governor Raghuram Rajan left the benchmark rates unchanged at 7.25 per cent in RBI’s bi-monthly policy review on August 4. However, given the current trend of CPI, WPI and the index of industrial production, the central bank may soften its stance on the key interest rates. Chief economic advisor Arvind Subramanian said that the data on CPI and WPI along with the growth in the deposit into the banking system, and moderation in gold import, point towards a big structural shift in underlying process of inflation, and “that is something is very encouraging.” During the month, retail inflation fell 3.78 per cent while index of industrial production grew 3.8 per cent in June, bringing in cheers to the government.