India’s Wholesale Prices Fall for First Time in Three Decades
India’s wholesale prices fell for the first time in three decades, making it more likely the government will unveil measures to stimulate demand in next month’s budget.
Wholesale prices declined 1.61 percent in the week to June 6 from a year earlier after gaining 0.13 percent in the previous week, the government said today. That’s the first drop since December 1978, according to the central bank’s monthly data. Economists expected a 1.52 percent contraction.
Inflation won’t stay negative for long, especially if Finance Minister Pranab Mukherjee uses his July 6 budget to stoke growth in Asia’s third-largest economy. Rising energy costs may cause inflation to accelerate to as much as 8 percent within a year, twice the central bank’s target, according to economist Robert Prior-Wandesforde.
Faster inflation “will almost certainly put paid to any chances of a further rate cut, which had already diminished significantly given the prospect of an expansionary budget,” said Prior-Wandesforde from HSBC Holdings Plc in Singapore.
Inflation has eased from a 16-year high of 12.91 percent in August last year, enabling the central bank to reduce interest rates to record lows to bolster an economy expanding at the slowest pace since 2003. The Reserve Bank of India last cut its key reverse repurchase rate by a quarter-point to 3.25 percent on April 21.
The central bank estimates that six interest-rate cuts in seven months and three stimulus packages will provide a combined stimulus to worth about 7 percent of gross domestic product to the $1.2 trillion economy.
Reversing Policy
Governor Duvvuri Subbarao said last month that it might be time to start thinking about reversing “expansionary” policies. The central bank’s next monetary policy statement is due to be released in Mumbai in late July.
Some economists expect Subbarao to start increasing borrowing costs by the end of this year or in early 2010, including Tushar Poddar at Goldman Sachs in Mumbai and Sailesh Jha at Barclays Plc in Singapore pay day loans.
India’s economy is already beginning to show signs that it may be emerging from the worst global slump since World War II.
Industrial production unexpectedly rose in April, increasing 1.4 percent from a year earlier, according to figures released by the statistics bureau on June 12. Economists were expecting a 0.1 percent contraction.
An index of composite leading indicators for the Indian economy compiled by the Organisation for Economic Cooperation and Development rose 0.4 point in April from the previous month, the first increase in 16 months.
‘V-Shaped Recovery’
The positive signals come on top of 5.8 percent GDP growth in the first quarter from a year earlier, which matched the pace of the previous quarter and beat the 5 percent median forecast of economists surveyed by Bloomberg News.
“Growth expectations continue to rise,” said Jha from Barclays. “We maintain our view that India will experience a V- shaped recovery in GDP growth and inflation during the second half of 2009.” Jha expects the central bank to raise its reverse repurchase rate by 50 basis points in the final quarter of this year.
The Reserve Bank of India looks at other inflation gauges besides the wholesale price index when deciding its monetary stance, according to Governor Subbarao.
Consumer prices paid by industrial workers rose 8.7 percent in April from a year earlier, after gaining 8.3 percent the previous month, according to government data.
India has four consumer price indices and uses the wholesale price index as the benchmark measure as the other inflation gauges don’t capture the aggregate price picture.