WPI inflation may drop to single digits by October

Wholesale inflation (WPI) in India continued to decline, dropping from 13.93% in July to an 11-month low of 12.41% in August. The wholesale pricing index remained in double digits for the 17th consecutive month in August despite the slight cooling off. The increase in inflation shown in the food articles section, up from 10.77% in July to 12.37%, is one of the reasons the WPI numbers have remained above 10%. On the strength of the expanding base, easing commodity prices on rising recessionary fears across major advanced economies, and weakening demand conditions in China, economists anticipate that wholesale inflation will continue to decline in the coming months.

The expanding base, dropping commodity prices in response to growing recessionary fears in major advanced economies, and weakening demand circumstances in China all point to potential future relaxation in the wholesale inflation trajectory. However, lingering global unrest and currency declines can cancel out some of these consolation considerations.

Commodity prices moderating and the gradual pass-through of the constraints on input costs that producers previously faced, it is evident that the difference between CPI and WPI inflation is on the decline. The Kharif harvest and the degree to of the global crude oil price unwind will determine the rate of a further drop in WPI inflation. However, given the anticipated improvement in demand, the trajectory of CPI might not be comparable to that of WPI.

After rising to high levels, WPI inflation slowed down in August. Even though the difference between the WPI and CPI is narrowing, relieving some producers, it is still substantial enough to maintain the MPC on its course of front-loaded rate increases. With a 6.17% y/y reading, Core CPI mostly met our forecasts, said, Rahul Bajoria, MD & Chief India Economist, Barclays.

An additional month of inflation that is higher than expected from a policy standpoint opens the door for additional monetary tightening at the MPC meeting on September 30. We still feel that the relatively durable growth forecast, along with strong credit growth and sticky core inflation, will maintain the RBI’s focus squarely on managing inflation, even though a number of supply concerns seem under control and inflation projections are biassed lower, he added.

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