Inflation in sub-zero zone; govt unfazed
The Financial Express, June 19, 2009, Page 1
Economy Bureau, New Delhi
For the first time in over 30 years, inflation turned negative at minus 1.61% for the week ended June 6. But analysts and policy advisors said India did not face the threat of a contraction in demand-or deflation-as the economic growth was holding up.
The negative reading of the inflation figure was mainly from the high base effect since inflation was elevated during the same time last year. Inflation was at 11.66% during the same week last year.
Inflation is likely to remain in the negative zone for 2-3 more months, primarily on this statistical effect. A deeper reading of the inflation data, however, reflects that the price pressures still persist and have the potential to spoil the party, especially since oil prices have moved above $70 a barrel in the international markets on hopes that the slowdown was thawing.
“Inflation numbers are unusual but not unexpected. This does not really lead us to any major policy shift,” finance secretary Ashok Chawla said. According to him, falling inflation is not a reflection on demand contraction as the economy is growing.
Steep upward revision in the inflation data–sometimes by as much as 70 basis points since March 2009–indicates that inflation is on the rise. This, coupled with visible stability in the domestic economy, means the Reserve Bank of India is unlikely to cut policy rates, even though industry chambers on Thursday stepped up their demands for further reduction.
Some public sectors banks, though, plan to cut interest rates.
“India is in no way going into a deflationary zone; rather inflation is on the rise,” said Planning Commission member Saumitra Chaudhuri.
Another senior policy advisor, who asked not to be named, said, “If you see the accumulated inflation for this fiscal, it’s already turning higher compared to 2007-08.
More importantly, March onwards, the difference between the revised and provision inflation numbers is increasing. When this happens, it is a sure sign that inflation is on the rise. On the other hand, when the difference is lesser, it implies that inflation is decreasing.” For the week ended April 11, inflation was revised to 0.96% from 0.26% recorded during provisional estimates. Ignoring the inflation data, the 30-share BSE Sensex ended down 1.77% at 14,265.53 points as investors looked to book profits on an 80% rally since early March.
Chawla said, “It’s (negative inflation) a technicality borne out of the fact that fuel prices were very high during the corresponding period last year,” International crude oil, currently at $71 a barrel, was trading around $140 a barrel during the same period last year. As a result, the fuel index slipped by 13% to 326.2 from 374.2 in the corresponding week a year ago.
Planning Commission deputy chairman Montek Singh Ahluwalia said negative inflation was not a cause of concern. Former chairman of Prime Minister’s Economic Advisory Council Suresh D Tendulkar said RBI was unlikely to cut rates. “Some banks are already reducing their lending rates so I don’t see RBI cutting the policy rate,” he said.
“While primary articles were up 5.8%, manufactured products stayed flat (0%) and the fuel price index contracted by 12.8%. Of the headline -1.6% WPI, 1.3% was attributed to primary articles but this was offset by a -2.89% contraction in the fuel index,” Citi India wrote in a note on Thursday. While negative WPI readings will likely persist for the next 3 months, we expect inflation to edge up to 4% by year end, it said.
In its annual review of the monetary policy 2009-10 in April, RBI has projected inflation would turn negative during the year. “This is only of statistical significance and is not a reflection of demand contraction as is the case in advanced economies,” RBI had said.
The finance ministry projected the inflation rate to remain positive based on de-seasonalised inflation data. “The de-seasonalised month to month inflation rate turned positive in March, 2009, and remains so in April and May.
On an annualised basis, the (de-seasonalised) WPI inflation rate was 3.2% in March. Based on provisional data it declined to 0.8% in April and then shot up to double digit in May, 2009.
Inflation is, therefore, very likely to turn positive before the end of the year and be positive for the year as a whole (average for 2009-10),” the ministry said in a statement on Thursday.
The Financial Express, June 19, 2009, Page 1
Economy Bureau, New Delhi
For the first time in over 30 years, inflation turned negative at minus 1.61% for the week ended June 6. But analysts and policy advisors said India did not face the threat of a contraction in demand-or deflation-as the economic growth was holding up.
The negative reading of the inflation figure was mainly from the high base effect since inflation was elevated during the same time last year. Inflation was at 11.66% during the same week last year.
Inflation is likely to remain in the negative zone for 2-3 more months, primarily on this statistical effect. A deeper reading of the inflation data, however, reflects that the price pressures still persist and have the potential to spoil the party, especially since oil prices have moved above $70 a barrel in the international markets on hopes that the slowdown was thawing.
“Inflation numbers are unusual but not unexpected. This does not really lead us to any major policy shift,” finance secretary Ashok Chawla said. According to him, falling inflation is not a reflection on demand contraction as the economy is growing.
Steep upward revision in the inflation data–sometimes by as much as 70 basis points since March 2009–indicates that inflation is on the rise. This, coupled with visible stability in the domestic economy, means the Reserve Bank of India is unlikely to cut policy rates, even though industry chambers on Thursday stepped up their demands for further reduction.
Some public sectors banks, though, plan to cut interest rates.
“India is in no way going into a deflationary zone; rather inflation is on the rise,” said Planning Commission member Saumitra Chaudhuri.
Another senior policy advisor, who asked not to be named, said, “If you see the accumulated inflation for this fiscal, it’s already turning higher compared to 2007-08.
More importantly, March onwards, the difference between the revised and provision inflation numbers is increasing. When this happens, it is a sure sign that inflation is on the rise. On the other hand, when the difference is lesser, it implies that inflation is decreasing.” For the week ended April 11, inflation was revised to 0.96% from 0.26% recorded during provisional estimates. Ignoring the inflation data, the 30-share BSE Sensex ended down 1.77% at 14,265.53 points as investors looked to book profits on an 80% rally since early March.
Chawla said, “It’s (negative inflation) a technicality borne out of the fact that fuel prices were very high during the corresponding period last year,” International crude oil, currently at $71 a barrel, was trading around $140 a barrel during the same period last year. As a result, the fuel index slipped by 13% to 326.2 from 374.2 in the corresponding week a year ago.
Planning Commission deputy chairman Montek Singh Ahluwalia said negative inflation was not a cause of concern. Former chairman of Prime Minister’s Economic Advisory Council Suresh D Tendulkar said RBI was unlikely to cut rates. “Some banks are already reducing their lending rates so I don’t see RBI cutting the policy rate,” he said.
“While primary articles were up 5.8%, manufactured products stayed flat (0%) and the fuel price index contracted by 12.8%. Of the headline -1.6% WPI, 1.3% was attributed to primary articles but this was offset by a -2.89% contraction in the fuel index,” Citi India wrote in a note on Thursday. While negative WPI readings will likely persist for the next 3 months, we expect inflation to edge up to 4% by year end, it said.
In its annual review of the monetary policy 2009-10 in April, RBI has projected inflation would turn negative during the year. “This is only of statistical significance and is not a reflection of demand contraction as is the case in advanced economies,” RBI had said.
The finance ministry projected the inflation rate to remain positive based on de-seasonalised inflation data. “The de-seasonalised month to month inflation rate turned positive in March, 2009, and remains so in April and May.
On an annualised basis, the (de-seasonalised) WPI inflation rate was 3.2% in March. Based on provisional data it declined to 0.8% in April and then shot up to double digit in May, 2009.
Inflation is, therefore, very likely to turn positive before the end of the year and be positive for the year as a whole (average for 2009-10),” the ministry said in a statement on Thursday.
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