WPI drops to lowest in 3 years

Inflation fell to its lowest level in more than three years last month, raising hopes an interest rate cut could come earlier than expected. Wholesale price index-based inflation, the most widely used gauge of prices, dropped to 6.62% in January, the lowest since November 2009 and its fourth straight month of decline. Wholesale inflation was 7.18% in December and 7.3% in January last year.
In this, core inflation or the rate of price increase in nonfood manufactured products — a measure of demand and tracked closely by the Reserve Bank of India — fell to a 34-month low of 4.1% in January, close to the central bank’s comfort level of 4%.
Some economists said a good budget with the right notes on fiscal discipline could tip RBI into wielding its monetary levers when it reviews policy on March 19. RBI, while cutting benchmark repo rate by 25 basis points last month, had raised concerns about high deficits, but analysts say the subsequent forecast of 5% economic growth this year — the lowest in a decade — by the statistics office could pressure it into making cuts now.
The finance minister has committed to reining in fiscal deficit at 4.8% of GDP in the next financial year, an improvement over this year’s revised target of 5.3%.
The RBI will be in a better position to cut rates if the budget sticks to this target through a credible set of expenditure and revenue numbers, although a sharply higher current account deficit and a declining savings rate pose challenges. The current account deficit rose to a record of 5.4% of GDP in the July-September and is expected to worsen because of the widening trade deficit.

The decline in the inflation numbers for January was largely on account of a slower rise in prices of manufactured goods, which have a weightage of 65% in the index, and lower fuel inflation despite the rise in diesel prices. Inflation in manufactured products dropped to 4.8% in January from 5% the month before. Although the fuel index inched up because of pricier diesel, the rate of inflation dropped to 7.1% in January from 9.4% in December because of the high base of last year. Food inflation continued its rise, coming in at 11.9% in January compared with 11.2% in December, explaining the rise in retail inflation to 10.8% in January from 10.56% in December.