Inflation to remain in negative territory for 2-3 months: Citi

NEW DELHI: Global financial services provider Citi on Friday said that inflation moving into the negative territory is "no surprise" and is likely to remain below sub zero level for the next two to three months.

"This is no surprise and is largely due to the base effect...WPI comes in at -1.6 per cent; to remain in negative territory for 2-3 months," Citi said in a report.

Having touched a peak of 12.9 per cent in August last year, inflation turned negative in the first week of June and declined by 1.6 per cent. Though inflation turned negative, the prices of food items like fruit and vegetables, cereals and oil have continued to move up.

Citi, however, said though negative inflation is likely to persist for the next three months, there is upside risk after that period and it may reach four per cent by year end.

"We expect inflation to edge up to four per cent by year end," it added.

Earlier, on Thursday, after the release of inflation figures, subzero inflation finally came to India as inflation dropped by 1.6% in first week of June to ten months after inflation peaked at 12.9% in early August. Annual inflation was at 0.13% in the week before. India's negative inflation patch - negative inflation is expected to be short- would essentially be due to a high base effect and supply side issues and is temporary in nature. The retail inflation as measured by consumer price indices is still hovering around 8%.

Inflation, as measured by changes in the wholesale price index over a 12 month period, could even turn out to have some bright spots, policy makers and economists said.The bond markets shrugged off predictions of deflation, saying it is just a statistical effect. ���The market understands that this deflation is more of a statistical effect and will not last for more than two months. An inverted yield curve - where long-term bond yields are lower than short-term bond yields - that usually precedes recession and deflation is not seen in India,��� says government paper primary dealer IDBI Gilts managing director N S Venkatesh.

Deflation is completely out of the question till industrial output con-tracts in the range of 5%-7%, which does not seem plausible as of now. Dr Pronab Sen country���s chief statistician said that this negative inflation scenario is not going to hurt anyone and it is completely different from the deflation, which we witnessed 33 years ago.

"Then the deflation was driven by an extremely good harvest season and a subsequent drop in food prices to record lows. Unlike then, this time around, the negative inflation will have a positive impact on growth," said Mr Sen.

"The manufacturers stand to benefit as the prices of inputs are coming down at a faster pace than fall in prices of finished goods. The domestic consumption demand remains strong even at a time when the demand from overseas and from private in-vestments has fallen," Dr Sen added.

"Just because Reserve bank of India is looking at Wholesale Price Index as one of the indicators for formulation policy responses, it falling into negative territory does not mean deflation," says Chetan Ahaya, Managing Director, and Research at Morgan Stanley. Currently, though private investment and overseas demand have contracted, domestic consumption remains strong enough to drive growth. Hence, the chances of inflation levels staying below zero for a sustained period is ruled out.