Inflation in negative zone at 1.61%

Pressure rise on food and interest rates to move southwards

Week on week inflation has been hovering around sub zero level and finally it has entered into negative zone. Inflation has dipped to negative for the first time since 1976-77, thanks to the higher base effect. The WPI based inflation recorded a fall of 1.1% in 1975-76 (base year being 1970-71=100). The substantial fall in inflation which continuing from August 2008 has become powerless to cheer up the end users due to the growth in food inflation. Rising cost of food articles has become the worrisome for the end users.

The official Wholesale Price Index for all commodities for the week ended 6 June 2009 rose by 0.04 % to 232.7 from 232.6 for the previous week. The annual rate of inflation, calculated on point to point basis, stood at -1.61 % for the week ended 6 June 2009 as compared to 0.13 % for the previous week and 11.66 % during the corresponding week of the previous year.

The index for primary articles declined 0.7% on fall in food article index. The index for food articles group declined by 1.2 % to 250.8 from 253.9 for the previous week due to lower prices of fruits and vegetables (7%), fish-marine (2%) and urad and gram (1% each). However, the prices of arhar (7%), jowar and eggs (3% each), masur and maize (2% each) and moong, mutton, ragi, condiments & spices and bajra (1% each) moved up.

However on year on year basis the index of primary articles moved up 6% while food articles also grew up by 9%. The yearly growth in these index has been reflected in higher CPI numbers.

The index of fuel, power, light and lubricants rose by 0.7 %to 326.2 from 324.0 for the previous week due to higher prices of furnace oil and naphtha (7% each) and light diesel oil (4%). However, the prices of bitumen (3%) declined.

One of the major index in India's WPI basket, that is manufactured product rose by 0.1 % to 203.8 from 203.5 for the previous week. The all-major contributors like food product, textile group, rubber and plastic product, basic metals and alloys index move up from their previous week level. The index for textiles group rose by 0.2 % to 141.7 from 141.4 for the previous week due to higher prices of polyester staple fibre (3%) and hessian cloth (1%). The index for basic metals alloys and metal products group rose marginally to 255.4 from 255.3 for the previous week due to higher prices of lead ingots (4%) and foundry pig iron and basic pig iron (1% each).

The hike in minimum support price, growing demand for oilseed, decline in food credit by commercial bank led to increase in a food prices. In addition to this delay of monsoon craft an anxiety about the kharip agricultural food production. If the output fails to achieve the predictable level of production then fear of price rise will escalate.

The constant fall in inflation give additional room for expansionary monetary policy action. However decline in WPI is not the only sole factor for softening key interest rate. The other factors like liquidity condition, revival in consumer demand, elevated level of CPI also needs to be considered while commenting on general economy outlook. In addition to this recovery in global commodity prices especially in crude oil create fear of price rise. The negative inflation is short lived looking at the strong domestic consumption demand which can drive growth and thus inflation remaining below sub zero levels is unsustainable for a longer period.

Negative inflation numbers are adding stress on interest rate to move southwards. Recent inflation numbers will change the direction of interest rate in India.