Inflation plunges to historic low of 0.44 percent; deflation feared, rate cuts seen

According to government data released Thursday, the wholesale price index (WPI), India's most widely watched inflation measure, sank to 0.44 percent for the week ended 7 March, 2009, as compared to 2.43 percent for the previous week and 7.78 percent during the corresponding week of the previous year.

The inflation rate had touched a 13-year high of 12.91 percent last August due to global slump and slowdown in domestic demand.

A close look at the latest data reveals that decrease in prices of primary articles and fuel, power, light and lubricants resulted in the sharp fall in inflation rate.

The index for the Primary Articles Group (which has a weight of 22.02 percent on the WPI) slipped 1 percent compared to the previous week due to decline in prices of food articles such as gram (down 5 percent), tea and fruits & vegetables (down 3 percent each), jowar and condiments & spices (down 2 percent each) and masur (down 1 percent).

Also slipping were the prices of non-food articles such as raw cotton and linseed (down 5 percent each), rape & mustard seed and groundnut seed (down 4 percent each), copra (down 2 percent) and gingelly seed and sunflower (down 1 percent each).

However, among the food articles, the prices of moon and fish (marine) jumped 2 percent each while, among the non-food articles, the prices of raw rubber climbed 3 percent.

The index for Fuel, Power, Light & Lubricants Group (which has a weight of 14.23 percent on the WPI) eased 0.8 percent compared to the previous week due to lower prices of aviation turbine fuel and electricity for agriculture (down 8 percent each), light diesel oil (down 7 percent) and bitumen (down 2 percent).

However, the prices of naphtha and furnace oil gained 3 percent each while those of electricity for domestic, commercial and industry and railway traction moved up 1 percent each.

The index for Manufactured Products Group (which has a weight of 63.75 percent on the WPI) remained unchanged compared to the previous week.

Products, which witnessed noticeable decline in prices were woolen yarn (down 6 percent), newsprint (down 2 percent), oxygen gas in cylinder (down 14 percent), liquid chlorine (down 3 percent) and acetylene and titanium dioxide (down 2 percent each).

However, the prices of computer & computer-based systems increased a significant 7 percent.

According to a government statement released by the Finance Ministry, this is the steepest drop since November 2008.

"In the last 30 years, there is no record of inflation falling this low since 1977-78," the statement said.

Commodity group-wise, among the primary articles, the inflation rate declined to 4.4 percent as against the previous week. Among food articles, inflation fell to 7.4 percent after having been stable at 8.3 percent in the previous two weeks while among non-food articles, inflation decelerated to (-) 1.7 percent compared to 1.3 percent last week.

Among manufactured products, the inflation rate eased to 1.3 percent as against the previous week while in fuel and power group, inflation clocked (-) 6 percent versus (-) 5.1 percent in the earlier week.

The sharp fall in inflation rate has triggered renewed fears of deflation, prompting market analysts to claim that the latest inflation data would open the way for the Reserve Bank of India (RBI) to cut interest rates further to lower the cost of credit for the corporate sector and push demand.

According to Shubhada Rao, chief economist at Munbai-based Yes Bank, "The dramatic decline in this week's inflation number is essentially a reflection of a very strong base effect."

"This, combined with weaker demand conditions imply a strong likelihood of inflation going into negative territory in the next couple of weeks," Rao said.

"We expect negative readings to start in late March or early April, lasting for around two quarters (six months)," said Sonal Varma, economist at Nomura Financial.

"From the policy perspective, we continue to expect the RBI to cut both the repo and reverse repo rates by 100 bps by mid-2009," he said.

"This is the lowest set of numbers in the current WPI series (that has 1993-94 as the base year for prices) and there will definitely be a technical deflation, which will accelerate the probability of a rate cut," said Sujan Hajra, the chief economist at Anand Rathi Securities.

"This (fall in inflation) has provided more headroom to the RBI for further strong monetary measure to revive demand and support the economy," said Yashika Singh, research head at Dun & Bradstreet, India.