Near-zero inflation to spur calls for rate cuts

NEW DELHI: Wholesale price inflation may be headed towards near-zero levels due to a fall in global petroleum and other commodity prices, which is expected to result in fresh demands for interest rate cuts by the Reserve Bank of India.

Although RBI has started using retail inflation for its policy goals, the clamour for a rate cut is going to get louder as industrial production contracted by over 4% in October, data released on Friday showed.

The government is due to release the wholesale price inflation data on Monday and official estimates suggest that the level will be close to zero, reinforcing the disinflationary trend seen in recent months with retail inflation, measured by consumer price inflation, estimated to have moderated to a record low of 4.4% in November, the fifth consecutive month of decline.

Wholesale price inflation is already at a five-year low, having moderated to 1.8% in October from 2.4% in September. In the summer of 2009, after a sharp fall in commodity prices in the wake of the global financial crisis, wholesale inflation had slipped into negative zone but the consumer price index for industrial workers, then used as a proxy for retail inflation, had stayed in double digits.

This time both retail and wholesale inflation are moving in the same direction. "WPI is expected to moderate further. The disinflationary trend has picked up but core CPI remains (non-food and non-oil) at 5.8%," said Dharmakirti Joshi, chief economist at ratings agency Crisil.

Although RBI governor Raghuram Rajan has so far resisted the demand for a rate cut, there is a stronger pitch from the government with finance minister Arun Jaitley himself making a case and lawmakers supporting the demand in Parliament last week.

The government has argued that a rate cut is critical for a boost to consumer demand which will help sectors such as housing and construction. The government sees a pick-up in these sectors to be critical for higher demand for steel and cement besides creating more jobs in the economy.

With loan demand staying low, banks are flush with funds also because companies have preferred to access foreign debt at cheaper rates. Some economists, however, believe that the moderation in inflation is the result of global factors and structural changes, such as those to boost food production, are yet to be taken. Food inflation has been a critical factor behind high inflation in recent years.