Inflation tumbles, gives RBI ammo to cut rates

Drops To Nine-Month Low Of 6.84% On Fuel Price Cut

FALLING fuel prices have pushed down inflation to a nine-month low, creating room for the Reserve Bank of India (RBI) to pursue more aggressive monetary policies to tide over the slowdown.

The annual rate of inflation, as measured by the wholesale price index (WPI), dropped to 6.84% for the week ended December 6 against 8% for the preceding week, according to data released by the Centre on Thursday. “This fall in inflation will translate into lower interest rates.

The RBI must be keeping a watch and will take further steps if needed,” Ashok Chawla, secretary in the department of economic affairs, told reporters.

Bond yields plunged to fresh fouryear lows on Thursday after the announcement of inflation numbers, as expectations of a steep cut in interest rates gained strength. The bond market has already factored in the recent cuts in repo and reverse repo rates by 250 basis points to 6.5% and 100 basis points to 5%, respectively.

On Wednesday, chief economic advisor to the finance ministry Arvind Virmani had said that RBI’s monetary policy should have been “more aggressive” to counter the impact of the global financial crisis. One key reason for the fall in inflation for the week ended December 6 was the continuous decline in international crude prices, which led to a sharp drop in the cost of fuel products.

The prices of market-determined products fell in line with global trends. While naphtha prices fell 23%, furnace oil and aviation fuel saw declines of 15% and 7%, respectively. The government pitched in with a 10% and 6% reduction in the prices of petrol and diesel. All these resulted in annual inflation in the fuel category dropping to 0.57% from a high of 18% in early August. Further price cuts by the government could drag fuel prices below last year’s levels, analysts pointed out.

Prices of food articles, which were growing steadily in recent months, eased for the second consecutive week. The annual rate of inflation in this category moved closer to the single-digit mark at 10.19%. DK Joshi, principal economist at credit-rating agency Crisil, pointed out that the sharp drop in inflation gives room for aggressive monetary policy measures to boost the economy. SENSEX BACK AT 10,000 The Sensex closed above the 10-k mark for the first time in over a month. It ended the day at 10,076.43, up 361.14 points or 3.7%. P 16 Lower cost of funds to give more respite to economy “THE prices of food articles have started to ease and concerns regarding an upward movement of prices in this segment can be set aside. The second round impact of a fall in commodity prices is beginning to be reflected in the manufacturing segment,” he added.

The annual rate of inflation for manufactured products continued to drift down. It touched 7.3% in the week ended December 6, way below the peak of 11.9% seen in the second half of August. As the 4% cut in excise rate gets factored into the prices of manufactured items in the coming weeks, inflation in this category would fall further.

NS Venkatesh, managing director of IDBI Gilts, said the cost of credit will decline over the next couple of months. “Inflation has been coming down at a rapid pace and banks are cutting their deposit rates. The reduced cost of funds will begin to be reflected in the credit cost within two months, giving respite to the economy suffering from high cost of credit,” he said.