Wholesale price of products, which has been declining compared with last year, remained soft but the pace of decline slowed last month due to higher food and fuel prices in the country, official figures released on Monday showed.
Wholesale prices have been softening since late 2014 and declined 2.36 per cent in May, recording the seventh straight month of deflation. Wholesale prices had shrunk 2.65 per cent in April.
While deflation is considered a poor indicator for the state of an economy, the deflation in India is more a reflection of a base effect due to sharp fall in crude oil prices, rather than structural weakness and low demand.
The wholesale price index (WPI), a combination of three broad categories—primary articles, fuel and power and manufactured products— captures price movements and demand supply shifts in industry at large besides manufacturing and construction.
Although WPI has lost relevance in recent times as it leaves out the services sector, which constitutes over half of the economy, it is still seen as an important indicator as it tracks the manufacturing products prices.
Earlier, WPI was the main determinant of monetary policy in the country but this was replaced last year by retail inflation or direct index of prices for consumers as the key factor for RBI's policy decisions. According to consumer price index numbers released on Friday, inflation rose marginally to 5.01 per cent from 4.87 per cent in April as prices of vegetables and pulses soared.
Meanwhile, wholesale prices of products rose for all key categories last month compared with April, with prices of primary articles rising 1.3 per cent. While prices in fuel and power category increased 3 per cent, manufactured products, which accounts for two-thirds of the index, rose 0.2 per compared with a decline of 0.1 per cent in April. On a month-on-month basis WPI rose for a third straight month and was up 1 per cent over April.
The increase in food prices came on the back of unseasonal rains that destroyed crops in March. While the government has been able to contain the prices from sky rocketing by releasing buffer stock, forecasts of a below-normal monsoon are expected to feed further into price pressures.
The strengthening price of crude oil internationally also contributed to a rise in month-on-month wholesale inflation. Although crude prices are still below the $100 level that they traded last year, prices have bounced back from lows they reached in January-February this year. A falling rupee also contributed to the rise in crude basket as much of the Indian fuel requirements is met through imports and weak currency exacerbates the impact of higher crude oil price on domestic inflation.
While new consumer and wholesale price inflation levels leave some wiggle room for the RBI to cut rates, the central bank might wait for more data in terms of impact of monsoon on agriculture before it takes a call on further rate cuts. RBI has already cut policy rates thrice this year to pump prime investments in the country to boost the output in the manufacturing sector in particular.
