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India's headline inflation fell to a two-year low of 7.47 per cent in December 2011, from 9.11 percent in the previous month.
The decline has been largely contributed by the sharp deceleration in food inflation. Some base effect also helped show a better picture for the month under review. The wholesale price index (WPI) based inflation had touched 9.45 per cent in December 2010.
All eyes are now on the Reserve Bank of India, which may look at reducing policy rates at its monetary policy review on January 24. This would signal a reversal of the monetary tightening stance of the last two years.
The RBI had left key rates unchanged in its mid-quarter policy review in December last year as it faced flak from industry for stifling growth through its tight monetary policy. The RBI had already hinted that it may loosen its monetary policy stance in future if inflation moderates.
Reacting to the sharp dip in overall inflation in December, the Finance Minister, Mr Pranab Mukherjee expressed confidence that moderation in inflation would continue in the coming months. He expects overall inflation to come down to 6-7 per cent in end-March.
The recent rebound on the factory output growth in November coupled with the dip in headline inflation in December indicates some improvement in the overall macro-economic parameters in the second-half of 2011-12, Mr Mukherjee said.
The Finance Minister, however, said that softening in the prices of manufactured goods may be more gradual. Manufactured goods inflation is still a matter of concern, he added. Manufactured goods inflation for December 2011 stood at 7.4 per cent, lower than 7.7 per cent in the previous month.
Dr C. Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said that the decline in headline inflation in December 2011 was a “welcome sign”. He attributed the dip in overall inflation in December to the sharp deceleration in food inflation.
He, however, highlighted that manufactured goods inflation remains high, which is a matter of concern. This has to be taken into account by the policymakers before looking at reducing policy rates, Dr Rangarajan told Business Line here today. Manufactured items have a weight of 65 per cent in the WPI basket.
Monetary pause
Many economists feel that the central bank may continue to pause on the monetary policy front at its January 24 review despite the recent positive news on the IIP and headline inflation front.
Official data released today showed that vegetables were cheaper by 34.18 per cent and wheat by 3.81 per cent on an annual basis. Potato and onion prices also fell by 35.45 per cent and 60.45 per cent year-on-year during December.
Prices of food items rose at a lower rate of 0.74 per cent in December, compared with 8.54 per cent expansion in the previous month. Inflation in overall primary articles stood at 3.07 per cent in December, compared with 8.53 per cent in November.
Non-food primary articles, which include fibres and oilseeds also showed moderation by registering an inflation of 1.48 per cent in December, compared with 3.22 per cent rise in the previous month.
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