Indian inflation dips below 7%

Posted on August 14, 2012

Inflation in India fell below 7 per cent for the first time since November 2009, but it is unlikely to persuade the country’s central bank to cut interest rates despite the general economic slowdown.

Trade data, also released on Tuesday, provided further evidence of the economic gloom in India as the trade deficit expanded from $10.3bn in June to $15.5bn in July. Exports fell 14.8 per cent, to $22.4bn, while imports fell 7.61 per cent, to $37.9bn, according to the provisional data.

    The Indian economy has been suffering a slowdown for the best part of a year, with gross domestic growth falling to 5.3 per cent in the quarter ended in March, far below the near-double-digit growth it once achieved, alarming policy makers and politicians.

    The wholesale prices index rose 6.87 per cent year on year in July, compared with 7.25 per cent in June, mainly driven by an unexpected fall in fuel and power costs – a development that economists said they found confusing.

    “It’s a pleasant surprise . . .but it’s difficult to understand the reasons behind this massive correction in the WPI number,” said Anubhuti Sahay, economist at Standard Chartered in Mumbai. “It’s difficult to see why we saw this correction when between June and July oil prices actually moved up.”

    She added: “The number looks too good to be true and going forward, there is a risk that we might see an upward revision.”

    Inflation in the fuel and power index fell sharply, to 5.98 per cent year on year, from 10.27 per cent in June.

    Leif Eskesen, chief India economist at HSBC, said in a research note that the drop was due to an increase in prices for a number of government-controlled fuels in July 2011 – including high-speed diesel and kerosene – which created a base effect that lowered this month’s reading.

    The price of manufactured goods, which make up nearly 65 per cent of the index, rose 5.58 per cent in July, compared with 5 per cent in June. Food inflation remained above 10 per cent for the fifth consecutive month, at 10.06 per cent, in the face of a weak monsoon. Core inflation rose to 5.44 per cent in July, economists estimated, up from 4.9 per cent in June.

    The data suggest continued underlying inflationary pressures, said A Prasanna, economist for ICICI Securities.

    Mr Prasanna said the sub-7 per cent headline figure was likely to be temporary, meaning the Reserve Bank of India was unlikely to cut interest rates at its September 17 policy review meeting.

    “I think it would be premature if the RBI on the back of one number was going to cut,” he said. “Going by July’s policy statement and yesterday’s statement by the governor, I don’t think we’ll see any cuts in September.”

    For months, the central bank has, in its policy review statements, focused on inflationary pressures and its view that the government must do more in terms of fiscal consolidation. The RBI held rates at 8 per cent in July.

    DV Subbarao, the bank’s governor, in a speech on Monday reiterated the bank’s stance that inflation rates were “way above [the bank’s] threshold” of about 5 per cent.

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