Headline inflation fell to a three-year low of 7.18 per cent in December 2012, raising expectations of rate cut by the Reserve Bank of India in its monetary policy review meet on January 29.
This wholesale price index (WPI)-based inflation – which is India’s main gauge for inflation – was lower than the 7.24 per cent recorded in the previous month and 7.74 per cent in December 2011.
The latest headline inflation is the lowest since December 2009, when it was at 7.15 per cent.
The WPI-based inflation has seen over 200 basis points moderation over the last one year despite some increase in diesel prices, electricity tariffs and freight cost.
In fact, the market appears to have priced in at least a 25 basis points cut in policy rate on January 29.
The WPI footprint for October 2012 now stands revised downwards to 7.32 per cent against 7.45 per cent earlier.
While manufacturing products inflation saw a sharp decline to 5.04 per cent in December 2012 against 5.40 per cent in the previous month, the story was different on the food inflation front.
Food inflation continues to be a point of concern for policymakers as it saw steep increase to 10.61 per cent in December.
Meanwhile, retail inflation for December came in at a higher than expected level of 10.56 per cent, belying hopes of any aggressive policy rate cut by RBI on January 29.
The annual consumer price index (CPI) based inflation for November was 9.9 per cent.
“The main reason why CPI is high is because of food inflation. We must move the foodgrains stocks into the market so that prices come down,” C. Rangarajan, Chairman of the Prime Minister’s Economic Advisory Council, told a TV channel.
While declining to comment on the expected magnitude of policy rate reduction by RBI on January 29, Rangarajan, however, said that the direction has to be towards reducing policy rates.
Asked whether enough headroom existed for a series of cuts, he said it would depend on how inflation behaves in the coming days.
Rangarajan said he expected WPI-based inflation at seven per cent by end March and further decline in the next fiscal.
“WPI is moving in the right direction. There is softening of headline inflation. Downward adjustment of policy rate (by RBI) is a possibility,” Rangarajan said.