Wholesale prices in the country declined on the back of lower fuel prices in February with the rate of inflation, as measured by wholesale price index (WPI), shrinking 2.06 per cent last month over the year-ago period, official figures show.
This is the fourth month in a row that Indian economy has been under deflation from a wholesale price perspective. Prior to this, wholesale prices declined year-on-year in July 2009.
Till a year ago WPI was the key parameter dictating RBI's monetary policy. However, the central bank is now following consumer inflation for deciding policy rates. Consumer inflation nudged up marginally to 5.37 per cent in February. Although the inflation rate rose, it is still well within RBI's comfort level and remained below its new flexible inflation targeting zone of 2-6 per cent.
Meanwhile, WPI is seen as a proxy to manufacturing products prices and the continuing soft prices also signals how the industrial sector is not yet picked up. Secondly it is seen as a lead indicator of the direction of consumer inflation in the coming months.
"Though RBI now uses consumer prices as the key parameter defining its policy, WPI still remains an important indicator, it gives a picture as to where inflation is heading," said KK Mittal, managing director at investment advisory firm Venus Capital.
"WPI is also important to determine as to what manufacturing prices are doing," he added.
The WPI, which is 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.
Last month, prices declined over the three broad categories with fuel and power prices slumping over 4 per cent. Manufactured products, which accounts for two-thirds of the weight, declined 0.3 per cent.
Core inflation, which factors out the impact of volatile food and fuel prices, declined to 0.1 per cent from 0.9 per cent in January.
"The declining trend remains entrenched around fuel prices, but food and core WPI also remain low. Inflation in food articles was 7.7 per cent year on year and in energy prices it fell 14.7 per cent year on year. February is the last month of adverse base effects and the wholesale price index continues to fall, recording its sixth consecutive month-on-month decline," Siddhartha Sanyal and Rahula Bajoria, economists at Barclays, said in a flash research note.
The recent decline in wholesale prices leaves more room for the RBI to cut rates but economists are skeptical that the Indian central bank would loosen the screws on policy rates given that it has slashed rates twice within the last two months.
Aditi Nayar, senior economist at ICRA, said: "There is a low likelihood of a rate cut in the April 2015 monetary policy review, notwithstanding the lower-than-expected WPI print for February 2015 and the widening divergence between the WPI and CPI. We expect further repo rate cuts to be limited to 50 bps in the remainder of 2015."
The government is considering replacing the WPI in its current form as it has lost relevance in recent times due to its limited coverage of services sector, which constitutes 55 per cent of the economy. But it still has a long way to go before it introduces Producer Price Index, which is tracked in other global economies.
(Edited by Joby Puthuparampil Johnson)