Inflation slows to 3-yr low, RBI may cut rates

Down At 7.18% In Dec, Expected to Fall Further

New Delhi: The country's headline inflation slowed to a three-year low of 7.18% in December, bolstering prospects of an interest rate cut later this month to support faltering growth but separate data showed retail inflation heading back into double digits. 
    Data released by the commerce and industry ministry on Monday showed the annual rate of inflation, based on monthly wholesale price index, rose 7.18% in December compared to 7.24% for the previous month and 7.74% during the corresponding month of the previous year. 
    There were more reasons to cheer as inflation, which has remained stubborn for a significant period, was showing signs of moderating. The government also revised downwards the inflation number for October to 7.32% from the previously reported 7.45%. 
    However, retail inflation based on the all-India consumer price index (CPI) inched back into double digits, posing some concern. The annual inflation rate based on all-India general CPI (Combined) for December 2012 stood at 10.56% as compared to 9.90% for the previous month. The inflation rates for rural and urban areas for December 2012 were 10.74% and 10.42%, the Central Statistics Office said. This was largely driven by stubborn food prices.
    The moderation in manufactured product inflation came as a welcome relief. 
    "The most pleasing component is that for manufactured goods, which account for the bulk of the WPI and is probably the closest thing that India has to a core measure of inflation," said Glenn Levine, senior economist at Moody's Analytics. 
    "This gauge has been trending steadily lower for several months now and could go lower in the coming months. The fall was broad-based, with most sub-categories of manufactured goods showing lower inflation in December, suggesting that it is being driven by supply-demand dynamics. That is, the Indian economy has been growing below potential for several quarters and this is now driving inflation lower," Levine added. 
    Levine said he expects manufactured goods inflation will trend lower in the coming months, which will probably be enough to drag headline WPI slightly lower. "We are likely to see WPI inflation trend below 7% in the second quarter of 2013," he added. 
    Inflation has remained a policy challenge for the UPA coalition and the RBI for the past three years.