INDIA BUSINESS WORLD - MAY - JUNE 2007
The Month that was ...

INFLATION RATE DROPS BELOW FIVE PERCENT

Inflation has finally fallen below the 5% mark, closer to the Reserve Bank of India's (RBI) comfort zone of 4-4.5% for the medium term. The inflation rate, which measures the general level of prices of goods and services in the economy, hit a 10 month low at 4.85% for the week ended May 26. The rate was 5.06% for the week ended May 19.

The Wholesale Price Index (WPI) fell 0.09% from 211.9 points for the week ended May 19 to 211.7 points at the end of the subsequent week (May 26). Inflation fell on account of a decline in prices of food articles-both primary and manufactured-and a sharp 2.04% decrease in prices of fruit and vegetables. While prices of primary food articles fell 0.49%, the corresponding decline in prices of manufactured food products was 0.43%. However, prices of both rice and wheat, which showed declines in the inflation data released last week, increased marginally this time around by 0.11% and 0.13%, respectively.

Says member of PM's Economic Advisory Council, Saumitra Choudhari, "Inflation is likely to stay around 5%. The government may have to revise prices of petroleum products upwards sometime in the future."

The central bank is targeting to keep inflation at 4 4.5% in the mid term and under 5% for the current fiscal. Some economists attributed the fall in inflation to the base effect as well. Inflation fell because price movements are compared with those of the corresponding period last year, and the relatively high inflation base of 4.99% last year is putting downward pressure on inflation this time around.

"There are two main reasons for the decline in prices-a very strong base effect and high interest rates that have slowed down growth in some sectors such as automobiles and housing. However, lower inflation is unlikely to encourage RBI to reduce rates," said Crisil principal economist DK Joshi.