WPI inflation falling to 5-year low of 3.74% doesn't mean much; CPI is key

India’s wholesale price inflation (WPI) for August fell to 3.74 percent, its lowest level in nearly five years.

In July, the wholesale prices had risen 5.19 percent on year, marking its slowest pace in at least five months. August’s WPI inflation number is the lowest since October 2009. Simultaneously, the June WPI inflation was revised to 5.66 percent from 5.43 percent estimated earlier.

In the central bank’s scheme of things, however, the WPI inflation doesn’t matter much and what it gives more importance to is the consumer price index inflation (CPI) as the key price indicator to chart the course of its monetary policy.

The central bank’s inflation stance is based on the recommendation of an expert panel under one of the RBI deputy governors, Urjit Patel.

The Patel panel has targeted 8 percent CPI inflation by January, 2015 and 6 percent by January, 2016. On the other hand, the retail inflation has remained sticky, even though it has so far stuck to the ‘glide path’ of the RBI.

More from Finance

Asian markets, Wall Street hold gains after Fed signals easing extraordinary support measures for economy SuperMoney indeed: Mumbai-based startup raises a million USD from Unitus Ventures

But economists are still skeptical whether the prices will continue to slide giving enough comfort to the central bank to start cutting rates.

Retail inflation for August stayed below 8 percent for the third consecutive month (7.96 percent July, 7.46 percent in June), but the food inflation numbers, which is a key concern for the central bank, hardened to 9.42 percent from 9.36 percent a month ago.

On Monday, speaking at a banking conference, Raghuram Rajan has reiterated his commitment to fight down inflation before start cutting rates.

“Inflation is high not only in food, but also in non-food items and the best solution for the country is to bring it down. Then I can cut interest rates,” Rajan told bankers at a summit organised by industry body, Federation of Indian Chambers of Commerce and Industry.

“There is no point in cutting interest rates to see inflation pick-up again,” Rajan said, adding that right now he thinks the central bank is continuing the way it proposed recently.

Of the seven times, Rajan presided over the monetary policies, the repo rate was increased thrice by a total of 75 basis points (bps) to 8 percent and opted for status-quo four times. One bps is one hundredth of a percentage point.

The RBI would possibly wait for a few more quarters of sustainable slowdown in retail inflation, especially in the prices of fruits and vegetables, before cutting rates.