Hopes of economic stability

holesale price inflation fell to -4.05 per cent in July from -2.4 per cent in June, a historic low, sparking hopes of a rate cut by the Reserve Bank of India possibly even before its next scheduled policy announcement on September 29.

Sensex surges

Reacting to the news, the Sensex gained more than 500 points on Friday, and the rupee, which has come under pressure after China's move to devalue its currency, recovered to 65 per dollar. It had hit an intra-day low of 65.31 in early trades.

The July WPI data marks the ninth straight month of contraction in wholesale prices, and follows consumer price index (CPI) inflation slowing to 3.8 per cent in July from 5.4 per cent in June. The contraction in WPI inflation, which measures price-rise in inputs primarily for factory production, can be attributed largely to falling food and global commodity prices.

“That's a very positive sign as far as we are concerned... This speaks of the stability of economy that we are in. The inflation is under control, the manufacturing figures, IIP figures are quite encouraging, the indirect tax revenue figures are extremely encouraging. Even if you take out additional revenue measures... we still have a significant growth,” Finance Minister Arun Jaitley said on Friday while commenting on inflation during a press conference announcing Indradhanush, a major revamp plan of public sector banks.

At the same event, Chief Economic Advisor Arvind Subramanian said that the structure of inflation had changed.

Primary articles inflation contracted further in July, coming in at -3.7 per cent compared to -0.8 per cent in June, marking the third consecutive month of contraction.

Within primary articles, food articles inflation contracted to -1.16 per cent compared to 2.2 per cent in June. Vegetable prices in particular saw a sharp contraction, coming in at -24.5 per cent in July as against -7.1 per cent in June. Food inflation as measured in the CPI also slowed in July, from 5.5 per cent in June to 2.15 per cent in July.

“Food inflation numbers are also moderating. Even though we are having mixed signals with regard to the progress of monsoon, given government’s adequate preparedness on this front, we should be able to keep food prices under check,” said Jyotsna Suri, President, FICCI. Manufactured products inflation, with a weightage of 65 per cent in the WPI, fell to -1.5 per cent in July from -0.8 per cent in June. This comes on top of the manufacturing component of the Index of Industrial Production growing 4.6 per cent in June, the latest release.

Inflation in the fuel and power group continued its sharp contraction, coming in at -12.8 per cent in July compared to -10 per cent in June. The contraction in this segment has been in double digits for all but one month since January, driven by the ongoing contraction in the mineral oils segment. Mineral oil inflation came in at -19 per cent in July, following seven consecutive months of double-digit contraction. “The distinct downturn in both retail and headline inflation and the soft inflationary scenario makes a strong case for the RBI to reduce interest rates even before the next monetary policy announcement especially as industrial production continues to show sluggish growth, capital goods production has moved to the negative terrain in June and the recent devaluation of Chinese Yuan could hurt our export competitiveness in a subdued global environment,” said Chandrajit Banerjee, Director General, CII.

RBI Governor Raghuram Rajan had said, following the monetary policy announcement on August 4, that the central bank may consider a rate cut outside of the policy cycle if the situation demands it. “We are waiting for information. There was more need to move fast in the early stages of the turnaround. We will take all information into account and decide whether at times it warrants moving in between policy cycle or it does not,” he had said at the time.

Secretary, Financial Services, Hasmukh Adhia, speaking at the press conference announcing Indradhanush, said that the transmission of RBI's rate cuts by banks is lagging because of the high deposit costs incurred by banks.

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