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WPI to fall from 7.7% to 7% next year, RBI likely to cut rates this month – Crisil

Crisil Research expects average wholesale price inflation to fall slightly to 7% in the coming financial year from the 7.7% estimated for the current year, and sees the RBI cutting interest rates by a quarter of a percent in its monetary policy review on January 29.

The agency, part of the ratings group CRISIL, made the forecast while analyzing the data for the latest month.

It noted that wholesale price inflation has fallen to 7.18% in December — a far cry from the double digit monthly numbers seen in 2011. Primarily due to the high base created by 2011, monthly inflation rates fell in 2012 to the 7-8% range.

Crisil’s forecast seems to indicate largely stable inflation (not stable prices), though many have felt that WPI will fall further below 7% in 2013.

Double digit inflation during 2010 and 2011 have propelled prices in India to unseen levels, causing hardship to citizens, especially those at the bottom of the earning ladder. Most of the price rise has happened in the essential commodity segments, such as food and fuel, adding to the bite.

Because of the high base created during the two years — when whole sale price inflation was around 10% — inflation, which measures price rise, was expected to dip significantly in 2012. However, it moderated to only about 7.5% in the year.

Worryingly, food inflation continues to be high, though not as high as 16% seen earlier. However, inflation continues to be led by food item prices, Crisil noted. Most of the ease in prices is coming in the manufacturing sector, which has been hit by a slight slowdown due to global conditions and tighter credit conditions.

“Continued moderation in core inflation created downward pressure on overall inflation, offsetting the impact of a sharp rise in primary food inflation to 11.2 per cent in December. Core inflation – as measured by non-food manufacturing inflation – declined for a fourth consecutive month and stood at 4.2 per cent in December, down from a peak of 5.8 per cent in August 2012… This is indicative of the limited pricing power of corporates due to slowing demand in the economy,” Crisil noted.

Food inflation, which had declined to 6.6 per cent in October, has re-entered the double digit zone after 4 months. Lower summer foodgrain production affected by a delay in monsoons as well as a hike in minimum support prices in June 2012, created upward pressure on food prices, Crisil noted.

The slowing economy is likely to lead the central bank, the RBI, to ease the interest rates later this year, the agency predicted. GDP growth is likely at around 5.5% in 2012-13, Crisil had already forecast.

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