Inflation @ 8.90%, RBI may cut rates

MUMBAI: Inflation based on the wholesale price index (WPI) for the week ended November 8 was in line with UTVi estimates dropped to 8.90% from 8.98% in the previous week - the lowest in five-and-half months.

The positive factor from the easing in demand side pressures is that there could be further cuts in interest rates. In October, RBI reduced the key interest rate by 150 bps to 7.5% and banks’ reserve requirements by 350 bps to 5.5%. Despite these as well as a host of other measures by the government and regulators, industry and financial markets continue to feel the heat of the global turmoil.

WPI for all commodities declined 0.2% to 235.0 from 235.5 during the week ended November 1.  Inflation has slowed primarily due to the fall in the fuel index, which has a weight of 14.23% in the WPI. The group declined 0.9% week-on-week with the price of light diesel oil dropping 11%, furnace oil falling 9%, aviation turbine fuel declining 5% and  naphtha slipping 4%.

The index for manufactured products declined 0.2% following the drop in food products, rubber and plastic products, chemical items and basic alloys and metals. Groups such as textiles, machinery, and transport equipment rose in the manufactured products index, which has a weight of 63.75% in the WPI.

The primary articles index rose 0.4% to 250 with non-food articles rising 1.1% and food articles by 0.1% due to higher prices of fruit & vegetables.

Inflation slipped into single digits for the first time in over five months in the week ended November 1. The number had moved into double digits in June after domestic fuel prices were raised. Inflation had moved up to a high of 12.91% in August following the steep rise in commodity prices, mainly crude oil.

With crude oil and metal prices falling due to the impact of the global meltdown, inflation, globally, has been cooling off. Consumer prices in the US witnessed the biggest drop in a month in 61 years. CPI declined 1% in October - largely dragged by the collapse in crude oil prices. Similarly, the CPI in UK slowed to 4.5% last month from 5.2% in September.

Inflation is estimated to decline to 6-7% by December meeting the Reserve Bank of India’s March-end forecast of 7%. Some economists expect inflation to go down further by the end of the financial year.