WPI eases to 21-month low of 5.85%
While the numbers point to an ebbing of inflationary pressures, and could result in the Reserve Bank of India’s Monetary Policy Committee moving to a neutral stance when it meets in February, the increase in wheat prices could present a challenge in coming months.
India’s wholesale inflation, as measured by Wholesale Price Index (WPI), slowed to 5.85%, the lowest in 21 months data released Wednesday showed, continuing the trend shown by retail inflation, which slowed to 5.88%, the lowest in 11 months.
The main reason for the slowing was a cooling in food prices.
While the numbers point to an ebbing of inflationary pressures, and could result in the Reserve Bank of India’s Monetary Policy Committee moving to a neutral stance when it meets in February – the consensus among analysts is that there will be a slight increase in the interest rate as the central bank exits this rate tightening cycle – the increase in wheat prices could present a challenge in coming months.
November is the second consecutive month when wholesale inflation has stayed in the single digits. The moderation in November was largely on account of a moderation in food prices, a trend also seen in retail inflation in the month.
The latest WPI value is 2.54 percentage points lower than the October value, and the lowest reading since March 2021. To be sure, the single-digit inflation in the past two months is partly because of a high base. Wholesale prices rose by 14.9% in November 2021.
But the index also declined sequentially compared to October, suggesting some moderation in input prices.
“The core WPI inflation declined to 3.4% on the back of both a base effect (November 2021: 12.7%) and a decline in the global commodity prices. The sustained decline in core inflation is good news for the economy”, said Sunil Sinha, principal economist at India Ratings.
A category-wise analysis of the WPI numbers shows that food was the main driver of the slowing. Inflation in primary articles category, which contributes to 23% of the index (food contributes two-third to primary articles), has come down from 11.04% to 5.52%. Inflation in the manufactured products, which contributes to 64% of the index, has come down marginally from 4.42% to 3.59%. In the fuel and power category, which contributes to 13.15% of the index, inflation has come down from 23.17% to 17.35%. The food sub-category of WPI, which includes both primary articles and manufactured food items, fell to 2.17% from 6.48%.
The disaggregated data also shows a spike in wholesale wheat prices, which rose 18.11% on an annual basis in November, the highest since April 2013, and 1.86 percentage points higher than in October. Inflation in paddy prices decreased by only 18 basis points (one-hundredth of a percentage point) to 6.45% in November.
“Decline in rate of inflation in November, 2022 is primarily contributed by fall in prices of food articles, basic metals, textiles, chemicals & chemical products and paper & paper products as compared to the corresponding month of the previous year,” the commerce and industry ministry said in a statement.
With moderation in WPI prices, experts believe that RBI’s MPC will likely pause the hike in interest rates after February.
“We expect the WPI to remain contained, as a shift in the global commodity price cycle and favourable base effects continue to push wholesale inflation lower in the coming months... We are still tracking headline CPI around 6% in December, and momentum in core inflation staying somewhat sticky. Still, with CPI inflation returning within the target band, with international commodity prices down from their highs we expect headline inflation to fall further in the coming months. This should pave the path for the RBI to pause after delivering a final 25bp hike in February, which would take the repo rate to 6.50%”, Rahul Bajoria, MD and chief India economist, Barclays said in a note.