Inflation hits a 3-year low

Headline inflation dropped to its lowest in three years in December, reinforcing expectations that the Reserve Bank of India will cut rates at its policy review on January 29 to boost the economy, which is headed for its worst showing in a decade. The inflation numbers are the latest piece of data providing backing to those, notably the finance ministry, calling for a cut in interest rates after a fall in industrial output in November. Exports too shrank in December, indicating that the Asia’s third-largest economy was close to stalling. The annual rate of inflation, as measured by the wholesale price index (WPI), dropped to 7.18% in December — the lowest since December 2009 — from 7.24% in November. A closely watched subcomponent — core inflation — fell to 4.2% in December and revision in data for previous months was in a downward direction, signaling a softening in prices. Some economists say the debate had shifted from the timing of the cut to how much RBI will cut.
Former central bank governor and head of Prime Minister’s Economic Advisory Council C Rangarajan, widely regarded as one of the nation’s most influential policymakers, also felt RBI could think about cutting rates.
But not all measures of inflation pointed downwards.
Retail inflation climbed back into double digits, to 10.56%, in December compared with 9.9% in November, as its biggest component — food — became pricier from a year ago.

The build-up of expectations of a rate cut and the government’s decision to defer implementation of the controversial anti-tax avoidance rules by two years enthused investors, leading the BSE Sensex to close up 242 points, its highest level in over two years.

Yield on the benchmark government bonds dropped and the rupee strengthened.
The government welcomed the fall in inflation.
The government’s decision to revise railway fares and a proposed review of fuel prices has also signaled its commitment to fiscal rectitude, which could give the Reserve Bank of India room to loosen monetary policy to revive growth that is expected to drop to a decade-low of around 5.5% in the current financial year.
The drop in inflation was because of a slower rise in prices of manufactured products, the largest component of the wholesale price index, at 5% in December from 5.4% in November.
The moderation in fuel inflation to 9.38% from 10% in November also helped.
But inflation in food articles climbed to 11.2% from 8.5% in November.