December WPI eases to 5-month low, markets cheer likely pause in rate hike

Wholesale prices, India’s benchmark inflation, edged down to 6.16 percent from a 14-month high of 7.52 percent in November due to a 30 percent dip in vegetable price index.

Even CPI or retail prices eased to 9.87 percent last month against expectations of 10.14 percent.The moderation in CPI too was largely driven by a fall in vegetable prices, which cooled nearly 19 percent from November on improved supplies. That helped slow down annual food inflation to 12.16 percent last month from 14.72 percent in November.

The inflation data also comes on the heels of a surprise contraction in industrial production and a slowdown in merchandise exports growth, which have dampened hopes of a rebound in India.

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Ad with WPI inflation easing to a five-month low, there is room for the Reserve Bank of India to hold rates.

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Although RBI Governor Raghuram Rajan reckons price stability is a prerequisite for reviving India’s economic growth, he had left the lending rate unchanged last month, fearing that aggressive rate hikes could prolong the slowdown. He had warned of another hike, if headline as well as core inflation numbers do not moderate substantially.

However, now that both WPI and CPI have eased in December, policy makers will heave a sigh of relief afterstruggling to contain price pressures as growth hovers at a decade low.

Now that inflation level has surprised on the downside, experts don’t expect RBI to raise rates in the next policy review.

“Inflation numbers on the food side have come off sharply, which should help RBI hold rates for now,” said Sajid Chinoy of JP Morgan.

Madan Sabnavis, Chief Economist of Care Rating, expects the RBI to cut rates only in March. He expects CPI inflation to be 9.5 percent and WPI at 6.5 percent by March.

Stock markets cheered the lower WPI figure as the Sensex jumped229 points to 21262.33 while the NSE Nifty was up 66 points at 6308.

“Market is picking up a positive view from the WPI figures. It expects a pause in the rate hike cycle,” said market analyst Deven Choksey on CNBC-TV18. He expects the interest rates to fall only if inflation remains steady at these levels.

RBI’s next poliy review is on January 28.

With inputs from Reuters