Inflation falls to three-year low; raises hope of rate cut

New Delhi, Jan 14 (IANS) India's wholesale price-based inflation moderated to a three-year low of 7.18 percent in December on the softening in the price rise of fuel and manufactured goods, riaising expectations of an interest rate cut by the central bank later this month.

The Wholesale Price Index (WPI) based inflation, the country's main indicator of price rise, was at 7.24 percent in November and 7.74 percent in corresponding month of previous year, according to data released by the ministry of commerce and industry here.

This is the lowest rate of inflation since December 2009.

The moderation in inflation would give some relief to policy-makers, who have been struggling to balance the need for controlling the inflationary pressure and stimulate economic growth.

Inflation has remained at an elevated level despite a tight monetary policy adopted by the Reserve Bank of India (RBI).

There will be pressure on the RBI for rate cuts in its quarterly review of monetary policy for 2012-13 Jan 29, 2012.

"The decline in inflation for the second straight month should provide the RBI some comfort for a rate cut on Jan 29, the day on which the credit policy will be announced," said Naina Lal Kidwai, president, Federation of Indian Chambers of Commerce and Industry (FICCI).

Commenting on the monthly data, Anis Chakravarty, senior director, Deloitte in India, said the central bank might cut interest rates by 0.25 percent in the Jan 29 review.

"There are expectations of a 25 basis rate cut. However concerns remain on the retail side led by the food numbers which have crossed the 10 percent mark," Chakravarty said.

"Structural concerns persist on the food market mechanism which contribute to food inflation. This is going to be an important factor for the RBI to consider in its policy meet in end January," he said.

According to data released by the Central Statistics Office, retail inflation increased 10.56 percent in December as compared to 9.90 percent in the previous month.

The RBI has kept key lending and borrowing rates unchanged, saying inflation remained sticky and might rise further.

Another factor for the RBI, apart from a slowdown in inflation, will be the November's industrial production data, which had logged a negative 0.1 percent growth year-on-year in November 2012.

However, the increase in wholesale-based food price inflation to 11.16 percent in December from 0.79 percent recorded in the corresponding month of 2011, will remain a major concern for the central bank.

The rise in food prices was largely due to an exponential increase in the cost of onions, potatoes, wheat, rice and cereals, according to data released by the ministry of commerce and industry.

Onions became costlier by 69.24 percent, while potatoes became expensive by 89.68 percent and the price of wheat jumped by 23.23 percent. The price of rice was up 17.10 percent, prices of cereals were up 19.02 percent and pulses surged by 17.57 percent year-on-year.

Vegetables became expensive by 23.25 percent in wholesale market.

However, fruits' prices dipped a little at 5.76 percent from 8.78 percent a year-ago, while that of milk also slowed down to 5.825 percent from 11.02 percent reported in the corresponding month of 2011-12.

The cost of eggs, meat and fish also decelerated to 10.18 percent from 13.10 percent in the corresponding period of 2011-12.

Fuel and power inflation moderated to 9.38 percent in December as compared to 14.98 percent in the corresponding month of the last year.

Inflation of manufactured products declined to 5.04 percent in the period under review as compared to 7.64 percent in the corresponding month of previous year.

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