Wholesale prices decline 4% in July; sharpest drop in almost four decades

Wholesale prices of products slid for the eighth month on the trot declining by 4.05 per cent in July pulled down by lower prices of vegetables besides fuel over the year-ago period, official figures released on Friday showed.

This is the lowest level since September 1976 when it fell 5.33 per cent.

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, as captured by CPI, also slid to 3.78 per cent last month and remains well within RBI's comfort level and its new flexible inflation targeting zone of 2-6 per cent.

Prices of manufactured products, which accounts for two-thirds of the index, declined 1.47 per cent while those of fuel and power fell 12.8 per cent in July. Manufacturing products prices declined by 0.77 per cent in June while fuel prices dropped by 10.03 per cent over the year-ago period.

WPI is seen as a proxy to manufacturing products prices and the continuing soft prices also signal 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.

Prices in the primary articles category also declined 3.66 per cent in July with minerals shedding one-fourth of their price compared with July 2014.

Fuel prices have been one of the major factors that weighed down the index. Prices of brent crude dipped below the $50 mark as western world welcomed lifting of sanctions on trade against Iran. This is expected to keep WPI soft even this month.

"Although retail inflation has also fallen, the gap between CPI and WPI has increased. This along with 30 basis point median decline in base rate augurs well for corporate sector’s profitability, which is likely to reflect in balance sheet from next quarter," said Devendra Kumar Pant, chief economist, India Ratings & Research.

Even though the current numbers from WPI, CPI and industrial production, which registered a 3.8 per cent increase in June, make for a stronger case for rate cuts, the Chinese devaluation may play  spoilsport with RBI holding on rate cuts till the smoke on US Fed policy and uncertainty over China clears.

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