The wholesale price index (WPI) for December grew 6.16 percent, significantly lower than the previous month’s figure of 7.52 percent, and economists’ average expectation of 7.1 percent.
In conjunction with Monday’s consumer inflation number, which stood at 9.87 percent, it confirms the hypothesis of RBI Governor Raghuram Rajan, who chose to not pull the trigger on interest rates in December, expecting prices to fall.
The latest data has been driven largely by softening in vegetable prices as internals of the data release show prices of food articles falling 6.4 percent month-on-month while primary articles were down 5 percent.
Economists said the release likely rules out the possibility of an interest rate hike when the central bank meets on January 28. “In fact, we could even see an interest rate cut of 25 basis points in March if the trend continues,” said Madan Sabnavis, Chief Economist, CARE Ratings.
Also read: December WPI inflation eases to 6.16%
The country has faced stubbornly high inflation led primarily by food prices in the last few years. Efforts by the RBI -- 13 interest rate hikes by the previous governor and two by the incumbent -- have failed to tame prices as many economists attributed high prices to supply rather than demand problems.
At the same time, tight monetary policy took a toll on the economy with gross domestic product growth recently falling to a decade low recently.
Given continuing trend of falling vegetable prices this year, Sajjid Chinoy, Chief Economist, JPMorgan, said that he expects headline inflation to fall further.
Core inflation high
But the economist pointed towards relatively high core inflation as well, which stood at 2.8 percent, which, he said, could bother the central bank. “The RBI had last month said [to cut rates] it needs to see a substantial moderation in headline inflation. That has been met,” he said, “and non-food, non-fuel inflation to fall. That has not been met.”
Core inflation is calculated by excluding prices of volatile items such as food or fuel and given the weak demand in the economy, it should have collapsed by now, Chinoy said, adding that this was indicative of negative output gaps in the economy. “If growth picks up in the second half as it is expected to, inflation could rise again and this may require RBI to have a tight monetary policy in place for all of 2014.”
Impact on market
Both the stock and the bond markets reacted favourably to the inflation numbers. While the Nifty edged up 1 percent in Monday trade soon after, led by the Bank Nifty, yields on the 10-year government bond fell over 1 percent, or nearly 10 basis points.
“Along with a stabilization in the rupee’s movement, the market has taken note of inflation,” said Deven Choksey, MD, KR Choksey Securities. He added, though, that it was too soon to try and predict whether and when interest rates cuts would come through.
The falling inflation would boost confidence in the economy as corporates take up more projects and the consumer cycle revives, he added.
Bond yields are likely to stay around the current 8.75% range, according to Manoj Rane, Head of Fixed Income, BNP Paribas.
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