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Latest inflation rates might increase pressure on RBI for rate cut

RBI governor Raghuram Rajan left the benchmark rates unchanged at 7.25 per cent on August 4.

Written by Shruti Srivastava | New Delhi |
August 14, 2015 3:38:27 pm
RBI, RBI monetary policy, Raghuram Rajan, RBI rate cut, bank interest rate cuts, retail inflation, CPI, Business news, economy news, latest news, india news The retail inflation, which fell 3.78 per cent in July compared to 5.40 per cent in June, is also now tuning in to the WPI movements.

With the annual rate of inflation, as gauged by the wholesale price index (WPI), contracting to a decade low of -4.05 per cent in July, the clamour for a reduction in key interest rate by the central bank has gained further momentum.

The WPI declined sharply on the back of lower fuel and food prices during the month– with food prices which comprise 14.33 per cent of the WPI basket declining 1.16 per cent and fuel and power with a weight of 14.91 per cent registering a steep contraction of 12.81 per cent during the month. This is the steepest fall in data since 2005.

The data is in line with the movement in commodity prices across the globe. Oil, industrial and precious metal prices have been hit hard amid apprehensions that the downward slide in commodity prices is likely to reach a 13-year low, exceeding the low reached during the financial melt down of 2008. The S&P GSCI index, which is a measure of 24 commodities, lost 14 per cent of its value last month. Given the fact that commodity basket is very prominent in WPI, the reflection of global price movements is much more striking in the WPI.

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The retail inflation, which fell 3.78 per cent in July compared to 5.40 per cent in June, is also now tuning in to the WPI movements. So while pulses prices have sky-rocketed as per both WPI and CPI, overall, the food price inflation has come down.

As such, the headline inflation has been heading south since June 2014 when it stood at 5.66 per cent, subsequently falling to 1.66 per cent in October, turning zero in November and then entering into the negative zone in January 2015 when it stood at -0.95 per cent.

RBI governor Raghuram Rajan left the benchmark rates unchanged at 7.25 per cent on August 4. However, given the current trend of CPI, WPI and the index of industrial production, the central bank may soften its stance on the key interest rates.

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