For the week ending 6 Jun ’09, headline inflation (wholesale price index, WPI) was -1.61%. This is the first time since Dec ’78 that WPI inflation has turned negative. WPI for the week ending 11 Apr ’09 was revised to 0.96% from 0.26%.
Primary articles fell due to a sharp fall in the prices of fruits. Prices of vegetables, cereals, pulses, condiment, spices and non-food articles rose. Fuel deflation now stands at 12.83%, though the fuel index has risen w-o-w due to a rise in non-administered fuel prices.
The y-o-y deflation after three decades is due to the base effect. In sharp contrast, recent price pressures have pushed up annualised m-o-m overall and food inflation to 12% and 25%, respectively. The sharp rise in fuel and other commodity prices last year followed by the equally dramatic fall has created this situation.
India is likely to remain in deflation until Sep ’09. From the current perspective, however, a sharp rebound in inflation rather than prolonged deflation is the real concern. We expect end-FY10 inflation to cross 7%. A substantially sub-normal monsoon can add further woe to this process. These, coupled with continued subdued growth, make the choice of monetary policy ambiguous. While there is little scope or rationale for further cuts in the key policy rate, barring a decisive improvement in growth any rate hike remains unlikely.