Good news apparently beckons for the Indian economy. According to the Centre, wholesale prices fell for the tenth consecutive month in August. The wholesale price index (WPI) fell an annual 4.95 percent last month. For the uninitiated, WPI refers to the price of a representative basket of wholesale goods. Experts have contended that the recent fall in WPI is down to plummeting fuel costs. According to some in the government, the fall in WPI has improved the prospects of an interest rate cut by the Reserve Bank of India. What’s more, Arvind Panagariya, the vice-chairman with NITI Aayog, last month said that the economy needed a massive rate cut, with deflation on the horizon. The aim of this rate cut was to improve consumer demand and strengthen investment. Although some countries use WPI changes as a central measure of inflation, India has adopted a new Consumer Price Index (CPI) to measure inflation. In other words, the central bank tracks CPI data and not WPI to set interest rates. Therefore, the demand for a rate cut is slightly short-sighted, considering that both CPI and WPI numbers continue to diverge. Although WPI fell in the negative for the tenth consecutive month, CPI figures remained above permissible levels. According to experts not betrothed to the government, the current divergence between the two sets of figures would indicate that deflation in the Indian economy is out of the question. Meanwhile, a falling WPI could give the RBI some wiggle room to reduce its repo rate in its next policy meeting.
RBI Governor Raghuram Rajan, though, remains concerned about the resurgence in price pressures due to persisting supply-side <g data-gr-id="36">bottlenecks,</g> especially in the agriculture sector. India has witnessed below average monsoon rains this season, as a result of which prices of certain staple products such as onion are rising. Amid a supply crunch, retail prices of many pulses have crossed Rs 100 per kg mark in major cities across the country. Barring gram and masoor dal, all major varieties of pulses -- including tur, urad and moong -- are being sold at prices above Rs 100 per kg in the four metro cities due to lower production of the key lentils during the last harvest. To put these numbers in perspective, wholesale vegetable prices gained nearly 17 percent from July. In its bid to tackle soaring pulse prices, the Centre will receive 5,000 tonnes of <g data-gr-id="33">tur</g> (<g data-gr-id="32">arhar</g>) and urad pulses imports by October 20. In its monetary policy review in June, the RBI said that assuming reasonable food management, inflation is expected to be pulled down by base effects till August but to start rising thereafter. The policy of the central bank clearly hinges on caution and observation, at least until the United States Federal Reserve decides on what to do with its lending rates and even though retail inflation has eased further to 3.66 percent in August from 3.69. Inflation at 3.66 percent is still way above permissible levels. However, the central bank’s position could change when it convenes for its next policy review meeting on September 29.