Worries on Decling Inflation 

Courtesy : Financial Express

Cut in excise duty, reducing prices of aviation turbine fuel (ATF) and high base will bring inflation to zero level by the end of March, and prices would begin to fall by the middle of 2009, analysts feel.

 “WPI (wholesale price index) inflation will touch 0% by March end 2009, on the back of 2% excise duty cut, 7% cut in ATF prices and a strong base effect,” Axis Bank economist Saugata Bhattacharya said in a research note.

 In the middle of last year, inflation rose to 12.93%, way beyond Reserve Bank of India’s preliminary tolerance level of 5-5.5%. This prompted the central bank to tighten its monetary stance and raise key interest rates—repo rate (9%) and reverse repo rate (6%)—and cash reserve ratio (9%) in a series of steps.

 The tight money flow in the economy weakened the inflationary pressures, and inflation dropped to its lowest in last six years at 3.03%, in line with RBI expectations. The central bank estimates inflation to go below 3% by the end of the current fiscal.

 Consequently, RBI shifted its focus from inflation to growth, which has been hit due to tight credit condition and low demand. Through a flurry of measures since October, the central bank has injected more than Rs 4,00,000 crore. The steps include slashing of repo (overnight lending rate) and CRR to 5% each and reverse repo (overnight borrowing rate) to 3.5%.

 “With prices falling rapidly, we expect a period of deflation from the middle of 2009,” Goldman Sachs economist Pranjul Bhandari said in a report titled ‘Asia Economics Data Flash’. Axis Bank expects prices to fall starting April 2009.

 

The consumer price index (CPI) inflation, which better represents change in price of a household consumption basket, continues to be high, the note read. The CPI (industrial workers) inflation rose to 10.45% in January 2009 from 9.7% in December 2008. “This could possibly be due to higher retail food prices, particularly fruits and vegetables, in January as there was a transporters’ strike,” the bank said.

 However, it is likely to come down in the future with the cut in retail petrol, diesel and LPG prices on January 31 and the 2% services tax reduction on February 24 coming into effect, the note read.

Meanwhile, a Reuters Poll has estimated that inflation rate would drop to near seven-year low for the week ended February 28 due to lower prices.