Headline inflation dips to three-year low, industry demands reduction

15 August, 2012

It was unexpected and surprising for all when the July figures for headline inflation told a different story. According to the figures released by the government, the wholesale price based inflation had dropped to a 3-year low in July to 6.87%. The inflation was at 7.25% in the month of June 2012.

THERE WAS a slight fall in the food inflation, which fell to 10.06% from June's 10.81%. However, potatoes became costlier by 73%, rice by 10.12%, cereals by 8.29% and pulses by 28.26% on annual basis. The rate of price rise in the manufactured products was 5.58% in July, as against 5% in June.

On the back of surprise decline in headline inflation, the industry has raised its voice in favor of slashing the key policy rates i.e. repo rate by the Reserve Bank of India. “The RBI should immediately look at bringing down interest rates as inflation has been declining in the last two months. The time now is to pep up investments and simultaneously address supply side constraints,” said RV Kanoria, President, FICCI.

FICCI added that with the inflation numbers showing a decline and the global economic environment continuing to be challenging, continued hawkish monetary policy will not serve either the objective of reducing inflation or stimulating growth.

Confederation of Indian Industries (CII) said that food prices are way above the comfort zone owing to a sharp rise in prices of potatoes, pulses, vegetables, milk and rice.

CII said there is a need to take some urgent steps to address supply side bottlenecks - by delisting perishables from APMC Act, permitting farmers to sell their produce in the open market and open up FDI in retail - which would improve the productivity of agriculture and lead to a further decline in inflation.

“We hope that that the declining trajectory of inflation would encourage the RBI to revisit its monetary policy stance and cut its policy rates to rejuvenate growth in the industry which has been hit by high interest costs and flagging investments. As is evident, core inflation continues to be stable and inflation related to food prices is supply driven and not due to excess demand,” said Chandrajit Banerjee, DG, CII.

Industry body ASSOCHAM said the Wholesale Prices in Index (WPI) has shown marginal decline in July 2012 against last year. The build up in inflation during this financial year (2012-13) is also lower than last year.

“This provides a window of opportunities to bring down interest rates. A rate cut is further warranted because of the slow down in the industrial output as revealed in IIP figures given out last week,” said RN Dhoot, President Assocham.