Goldman Sachs sees deflation in India next month

NEW DELHI: Already witnessing a sharp decline in inflation, India would see deflation or reduction in general price level from next month due to slackening demand, financial services firm Goldman Sachs said on Monday.

Deflation can also come due to high base effect, which is an impact of high inflation last year on the current level of the rate of price rise, Goldman Sachs said.

"We expect yearly headline WPI inflation to fall rapidly below 1 per cent in March...and enter a period of deflation beginning in April, which could last till end-2009 due to not only continuing demand destruction but also a sharp step-up in the base," it said in a research report.

Inflation fell to over a six-year low of 2.43 per cent for the week ended February 28 against 3.03 per cent in the previous week mainly on account of a fall in the prices of manufactured products.



It further said that in a deflationary environment, those sectors with a high proportion of variable costs are likely to benefit from falling input prices.

In 2010, however, it expects inflation to come back due to both a gradual pick-up in demand, and conversely, a low base from 2009.

It further said that the Reserve Bank could slash cash reserve ratio (CRR) for banks by 150 basis points by mid-2009 to provide liquidity into the system.

However, it does not foresee further reverse repo (short- term borrowing) cuts till the end of general election, taking into consideration a 50 basis points cut in both repo and reverse repo rates on March 4.

"With a 50-bp cut in both the repo and reverse repo rates on March 4, we do not foresee further reverse repo cuts until the end of the elections," it added.

Meanwhile, research firm Dun & Bradstreet has also said that India may go into deflation by the beginning of April this year due to weak consumption demand and a higher base effect.

"There will be negative inflation for a few weeks in the first quarter of next fiscal, driven largely by higher base effect but we do not expect a pronounced deflationary trend in the economy," Dun and Bradstreet Chief Operating Officer Kaushal Sampat said.