The annual rate of inflation based on the monthly wholesale price index rose marginally to 0.1 per cent in December from zero per cent in November, due to an increase in food costs.
Although the monthly rate is on the rise, the decline in indices at both retail and wholesale prices has kept the hope for a cut in key policy rates by the Reserve Bank of India alive.
The policy review is scheduled to take place on February 3 and economists believe that a rate cut of at least 25 basis points (100 basic points or bps equal 1 percentage point) could take place even before the policy review.
The retail inflation (CPI) for the month of December was 5 per cent in comparison to 4.38 per cent in November. “Similar to trends in the CPI, the reversal in the base effect pushed headline WPI to 0.1 per cent in December from 0 per cent (in November). Core WPI (total WPI minus volatile components such as food) eased further to 1.5 per cent, from 2.2 per cent, reflecting subdued demand pressure,” said Rohini Malkani, an economist at CITI.
She expects the average WPI to be 3 per cent in the current fiscal year and 2.5 per cent in 2015-16.
“We maintain our view of the first rate cut in the first quarter of calendar 2015 and a cumulative 100 bps cut till fiscal year 2016 taking the repo to 7 per cent. But given current growth-inflation dynamics and the RBI’s December policy statement of the possibility of acting ‘outside the policy review cycle’, we wouldn’t be surprised if it does cut before the February Budget,” she said.
Aditi Nayar, Senior Economist with ICRA, said the fall in crude oil prices has further brightened the outlook for inflation, fuel subsidies and the current account balance. “We maintain our expectation that the RBI will commence a rate cut cycle post the presentation of the Union Budget at the end of February 2015,” she said.
Sonal Varma and Aman Mohunta of Nomura expect WPI inflation to remain benign through 2015, averaging -0.9 per cent on a year-on-year basis compared to 4.2 per cent in 2014.
This, they say, will be led by lower global commodity prices, which should more than offset the narrowing output gap along with lower domestic agricultural prices due to the moderation in rural wage inflation and the substantially lower increase in minimum support prices.