Inflation dips to 5-month low at 8.90%; Will interest rates fall now

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New Delhi, Nov 20 (UNI) The headline inflation rate for the week ended November 8 declined to a five-month low of 8.90 per cent, compared to 8.98 per cent in the previous week, primarily led by fall in two major Groups -- fuel prices and manufactured products -- giving greater room to the government, to what Prime Minister Manmohan Singh said, provide manoeuvrability to pursue more agressively monetary and fiscal policy.

The index for 'Fuel, Power, Light and Lubricant', which has a weight of 14.23 per cent in the index, declined by 0.9 per cent over the previous week. This is in line with the decline in prices of international crude prices.

The prices of light diesel oil dipped by 11 per cent, furnace oil by nine per cent, Aviation Turbine Fuel by five per cent, while naphtha prices were down by four per cent.

The index for 'Manufactured Products, which has a weight of nearly 64 per cent,' group declined by 0.2 per cent.

Four of the seven sub-groups in the 'Manufactured Products' major groups showed a decline. These are 'Food Products' by 0.4 per cent; 'rubber and plastic products' by 0.3 per cent, 'chemical and chemical products' by 0.6 per cent and 'basic metal alloys and metal products' by 0.4 per cent.

The sub-groups which showed an upward movement are: 'textiles group' by 0.5 per cent, 'machinery and machine tools' by 0.1 per cent and 'transport equipment and parts' by 0.1 per cent.

However, the index for other major group 'Primary Articles' rose by 0.4 per cent over the previous week.

What the Prime Minisiter had in mind while making his statement is that a lower inflation rate alone will enable the Reserve Bank of India(RBI) to undertake another rate cut and give scope to the government to push through the fiscal stimulus more aggressively.

The government plans a policy response to boost exports and undertake an additional 150 billion dollar push to the infrastructure sector, as a means of stepping up growth.

The Central Bank has reduced CRR by as much as 350 bps and SLR by one percentage point to boost liquidity. But this has not satisfied the thirst of the Corporate Sector for a further rate cut.

Only is a scenario of lower inflation can commercial banks justify lower deposit rates and consequentially lower lending rates.

The Finance Ministry in a statement said monthly de-seasonalised inflation rate has been negative during September and October, suggesting a continuing moderation in WPI inflation in coming months.

For the month of October 2008, the de-seasonalised inflation for primary food showed some increase, though there was significant decline in inflation rate of manufactured food. The overall monthly de-seasonalised inflation in manufactured products shows a continuing decline since September 2008, the Ministry said.

The index for 'Food Articles' group rose primarily due to higher prices of fruit&vegetables, masur, arhar, barley, gram and bajra (one per cent each).

However, the prices of jowar (seven per cent), tea (six per cent) and maize (three per cent) declined.

The index for 'Non-Food Articles' group rose by 1.1 per cent, while the index for 'Minerals' group increased by 0.7 per cent over the previous week.

Meanwhile, inflation for the week ended September 13 was revised to 12.42 per cent against 12.14 per cent earlier.

The government now seems quite sure that there is much less to worry about inflation than growth, particulary in an enviroment where the widespread belief is that the worst of the global recession is yet to come. With falling international crude and commodity prices and slack demand, inflation is expected to move Southwards.

This is not only the case with India but with most parts of the world. In the worst ever slowdown after the Great Depression, prices are no more a cause of concern.

But the Indian government for the past several months has been on fire fighting operation -- first inflation and now the slump.

The only hope in this situation is that unlike inflation the world is one on combating global turmoil, with Central Banks co-ordnating action in an unprecedented manner. This did not even happen in times of the Great Depression. But will this do the trick? Only the history will tell.


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