Inflation at 5-month low of 6.16%, raises rate cut hope

Vegetable prices drop, but food inflation still high

Wholesale price inflation slowed to 6.16 per cent in December, marking a 1.4 per cent decline from November. The lower inflation, resulting from a sharp fall in vegetable prices, has raised the possibility of RBI keeping interest rates on hold in its monetary policy this month-end.

Food price inflation, however, was still in double digits at 13.68 per cent, against 19.93 per cent in November, wholesale price index (WPI) data released on Wednesday show.

Led by a sharp fall in inflation in vegetable prices, primary inflation came down to 10.8 per cent from near 16 per cent in November, driving down the overall inflation, which came down from 7.52 per cent in November.

With inflation likely to abate, as vegetable prices are still falling, “we do not expect RBI to raise the repo rate in its monetary policy review on January 28,” Crisil said.

Vegetable prices have been a major contributor to inflation since last July; at one point onion prices rose by a whopping 350 per cent. From July to December vegetables contributed nearly 24 per cent to overall inflation.

In December vegetable prices finally saw a correction, which resulted in year-on-year inflation in the category falling to 57.3 per cent from a high of 95.2 per cent in November, Crisil said.

The WPI data came in the wake of an easing in consumer inflation that slowed to a three-month low of 9.87 per cent last month after vegetable prices dropped nearly 19 per cent since November.

Core inflation measured by non-food manufacturing rose marginally to 2.8 per cent, still close to RBI’s comfort threshold of 3 per cent.

After raising policy rate twice since September, RBI left it steady last month as it feared aggressive rate hikes could damage a weak economy. A surprise contraction in industrial production in November and a slowdown in merchandise exports growth in December justified RBI’s concerns.

“Vegetables as a class were costlier by 57.33 per cent, although the pace of increase in onion prices eased to 39.56 per cent from 190.34 per cent in November,” said Angel Broking economist Bhupali Gursale.

CII said the good news was that food prices were trending down. Good harvest should further help contain food prices. Besides, manufacturing prices are reasonably stable. This should prompt RBI to cut policy rates to rejuvenate growth, CII said.

CII calls for critical distribution reforms in agriculture and taking perishables out of APMC to improve the supply chain logistics and price discovery.

Icra senior economist Aditi Nayar said the continuing correction in vegetable prices in January and brisk sowing of rabi crops suggested that food inflation would moderate further soon. However, cereals and non-vegetarian protein items continued to display double-digit inflation, imparting some stickiness to food inflation, she said.

Food inflation is largely determined by supply side factors and “we hope the government pursues policies to address the shortage,” Ficci president Sidharth Birla.

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