Inflation near 3-year low, but RBI may be unmoved

Headline number below 7%, lowest since Nov 2009; food inflation still in double digits
BS REPORTER
New Delhi, 14 August

holesale price index (WPI)-based inflation eased to a 32-month low, prompting industry to demand an interest rate reduction by the Reserve Bank of India (RBI). But economists and market analysts said the drop in the headline number might not be enough to convince the central bank. Thats because though the overall WPI reading fell to 6.87 per cent from 7.25 per cent in June, core inflation (non-food manufactured items), the main indicator for the RBI to set its policy rate, went up to a fivemonth high of 5.45 per cent. Official data today showed manufactured inflation also rose to a five-month high of 5.58 per cent against five per cent in June. Non-food primary (items found in raw form) inflation almost doubled to 13.05 per cent in July from 6.85 per cent on the back of a sharp rise in prices of fibres and oil seeds. The rise in non-food inflation might be a result of supply constraints, considering that industrial production contracted 0.1 per cent in the first quarter of 2012-13. Food inflation declined but remained in double digits for the fifth month in a row. It was down to 10.05 per cent in July from 10.81 per cent in the pre-

MACRO FOOD FOR THOUGHT

WPI-based inflation (%)
10.1 10.7
Overall inflation Inflation
12

6.9 6.8 9.7

Manufactured products inflation

5.6
Food inflation
April 11 July 12

-3

Source: Ministry of Commerce & Industry

"The dip is welcome but inflation is still above the comfort level... 5-6% is the tolerable level of inflation"
MONTEK SINGH AHLUWALIA
Deputy Chairman, Planning Commission

| Overall inflation lowest since Nov 2009 | Exports contracted 5.05% while imports fell 6.47% in the first 4 months of FY12-13 | IIP contracted 0.1% in the first quarter of 2012-13 and 1.8% in June 2012 | GDP growth was at a 32-quarter low of 5.3% in Q4 of 2011-12 and a 9-year low of 6.5% in 2011-12

vious month, largely because of a base effect. The weak monsoon remains an upside risk to food inflation numbers. The drought-like situation in some parts of the country may push up food inflation. Fuel inflation fell to a 31month low of 5.98 per cent in July compared to 10.27 per cent in June, largely due to a fall in the market-determined prices of fuels. The upside risks to inflation remain, considering the drought in some areas of

the country coupled with rise in crude oil prices and pressure on the government to administer market prices for fuel, said Madan Sabnavis, chief economist, CARE Ratings. Even as industry body CII and others called for a rate cut, the decision will be tough for the RBI. The signs so far do not indicate an economic recovery. Industrial production contracted 1.8 per cent in June, dragged down by a massive fall in capital goods (27 per cent).

Severe sluggishness in demand led to Indias merchandise exports falling 14.8 per cent to $22.4 billion in July. 4>

Exports fall 14.8%

Indirect tax kitty up

Indirect tax collections rose about 23 per cent to ~39,787 crore in July, against ~32,289 crore in the same period last year. 4 >