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Wholesale price inflation hit a 21-month low of 5.85% in November, aided by a favourable base and a sharp drop in food inflation, further bolstering the notion that the price pressure in the economy has peaked.
The moderation in inflation — retail inflation already hit an 11-month low of 5.88% in November — amid easing global commodity prices has created some much-needed policy space for the government to push growth as it prepares the Budget for FY24.
The Reserve Bank of India (RBI), however, will closely track the magnitude of inflation, especially core retail inflation, in December and the Budget announcements before deciding whether to hold on to the rates in its February review, analysts said. Some say it will likely announce a small hike of 25 basis points in the repo rate in February to 6.5% before taking a pause.
Interestingly, inflation based on the wholesale price index (WPI) dropped below, albeit marginally, retail inflation in November for the first time since February 2021. It suggests the pass-through of elevated input costs to finished product prices is either over or nearing completion. Importantly, lower WPI inflation will augur well for corporate earnings and operating margins, as the rise in input prices would remain subdued.
Even a month-on-month seasonally-adjusted basis, WPI inflation recorded a decline of 0.15%, suggesting easing supply-side pressures, according to India Ratings’ principal economist Sunil Kumar Sinha.
Headline WPI inflation has dropped sharply and steadily since hitting an over 30-year peak of 16.63% in May. Inflation based on the consumer price index (CPI) dropped below the 6%, the upper limit of the central bank’s medium-term target, for the first time in November, after a gap of 10 months.
Icra chief economist Aditi Nayar expected WPI inflation to drop further in December on easing commodity prices.
In WPI, primary food inflation crashed to just 1.07% in November from 8.33% in the previous month, thanks mainly to a drop in prices of vegetable (20.08%), onion (19.19%) and fruit (1.07%) during the winter season. Primary article inflation hit a 21-month low of 5.52%.
Manufactured product inflation, which has a 64.2% weight in WPI, hit a 24-month low of 3.59%, broadly mirroring the easing of global prices of commodities like basic metals, mineral products, rubber, chemicals and pharmaceutical products. Fuel & light inflation eased to a 20-month low of 17.35% in November.
The broad-based decline in WPI inflation across food, fuel and manufactured goods segments in November came on the back of easing global commodity prices amid slowing demand due to a tightening of interest rates by key central banks.
Of course, at the retail level, core inflation still remained elevated at about 6% in November and the latest easing was driven mainly by slower price pressure in food. However, However, core WPI inflation eased to 3.4% in November from 4.7% in the previous month and 6.8% in September.
Meanwhile, trade sources said the western price cap of $60 per barrel of Russian oil will give large buyers like China and India certain leverage to bargain hard with even other producers for reasonable energy rates. Any drop in oil prices will also weigh on fertiliser rates and help a net commodity importer like India.
For its part, the RBI has hiked the repo rate by 225 basis points since May to 6.25% to tame inflation. Last week, RBI governor Shaktikanta Das said the central bank would keep “Arjun’s eye” on the evolving inflation dynamics and that war on price pressure would continue.
Although food inflation has substantially moderated, inflation in items like cereals, milk and products and crude petroleum and natural gas firmed up in November. While cereals inflation firmed up to a 112-month high of 12.9%, milk and products inflation edged up to a five-month of 6%. Even prices of crude petroleum and natural gas rose by a steep 48.2%, reversing the deceleration trend observed since May, India Ratings’ Sinha pointed out.
Nevertheless, Sinha expected headline WPI inflation to drop below 5% in December, given the favourable base and softening of global commodity prices. FE