CHEAPER fuel products have pushed down inflation to a nine-month low,
creating room for the Reserve Bank of India (RBI) to pursue more
aggressive monetary policies to tide over the slowdown.
The annual rate of inflation, as measured by the wholesale price index (WPI), dropped to 6.84% for the week ended December 6 against 8% for the week before that, according to data released by the Centre.
“This fall in inflation will translate into lower interest rates. RBI must be keeping a watch, and will take further steps if needed,” Ashok Chawla, secretary to the department of economic affairs in the ministry of finance, told reporters.
The bond market has already factored in the recent cuts in repo and reverse repo rates—by 250 basis points to 6.5% and by 100 basis points to 5%, respectively. Bond yields plunged to a fresh 4-1/2 year low after the inflation numbers were released, as expectations of steep interest rate cuts gained strength.
Incidentally, Arvind Virmani, chief economic advisor to the finance ministry, had opined that RBI’s monetary policy should have been “more aggressive” to counter the impact of the global financial crisis.
The sharp drop in fuel prices during the week ended December 6 was brought about by declining international crude prices. While naphtha (23%), furnace oil (15%) and aviation fuel (7%)—whose prices are market-determined—dropped in tandem with global crude prices, the government pitched in with a 10% and 6% cut in prices of petrol and diesel, respectively. The overall 3.7% lower fuel prices caused annual inflation in the fuel category to drop to 0.57% from a high of 18% in early August. If there are further cuts in fuel prices, as hinted by the government, fuel prices could fall below their levels last year (deflation), analysts pointed out.
Prices of food articles, a concern in recent months, eased for the second consecutive week. The annual rate of inflation in this category fell towards single digits to 10.19%. DK Joshi, principal economist at credit rating agency Crisil, pointed out that the sharp drop in inflation gives room for aggressive monetary policy measures to boost the economy. “Prices of food articles have started to ease, and concerns regarding upward movement of prices in this segment can be put aside. The second-round impact of the fall in commodity prices is beginning to get reflected in the manufacturing segment,” he added.
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