Covid impact: WPI enters deflation zone after 4.5 yrs

Raises hope of another 25 bps cut in repo by MPC

Wholesale prices, whose increase or decline is measured in terms of the wholesale price index (WPI), entered the deflationary zone for the first time in over four and a half years as the marker fell 3.2 per cent in May due to slackening demand in the economy, hit hard by the pandemic.

As this will translate into low retail inflation at some time, economists expect the Reserve Bank of India (RBI) to go for another rate cut of 25 basis points. Before this, there was a decline in the WPI — at 3.68 per cent — in November 2015. During that time there had been deflation for over a year, with the sharpest being in August 2015 at 6.14 per cent. The overall WPI was not available for April this year due to lockdown. However, the WPI rate stood at 2.79 per cent in May last year. Among major categories, it was mainly food items that showed a price increase, at 1.13 per cent, down from 2.55 per cent in April.

Aditi Nayar, principal economist at ICRA, said the extent of deflation in the WPI in May was deeper than she had pencilled in. “The minutes of the MPC’S last meeting revealed alarm in some of its members. Accordingly, we expect the MPC to continue to prioritise alleviating the pain caused by the fall in economic activity over inflation, which will almost certainly turn out to be moderate in the near term,” she said. She expected another cut of 25 basis points in the next MPC meeting. “The efficacy of further repo rate cuts in the current environment remains uncertain,” she added.

Softening global crude oil prices led to a fall in the prices of petroleum though governments — at the Centre and in some states — raised taxes on them. For the third month in a row, the fuel and power category saw prices deflating. These came down by 19.83 per cent in May, against 10.12 per cent in the previous month and 2.93 per cent in March. Petrol, diesel, liquefied petroleum gas (LPG) saw prices falling in May.

Madan Sabnavis, chief economist at CARE Ratings, said although the deflationary trend in wholesale prices was expected to persist in June, it would be above the May level. “Inflation in the fuel and power segment will see an uptick as the government has increased LPG prices and those of petrol and diesel have also gone up in the domestic markets,” he said.

“We may see food prices continue to be under pressure,” he said. Nayar also said the rise in prices of some commodities like crude oil might arrest the fall in the WPI.

She, however, said easing food prices foretold a welcome moderation in retail food inflation. Among food items, vegetables prices declined 12.48 per cent.

The overall consumer price index (CPI) numbers for May were not released. But food inflation hit 9.28 per cent in May, the official data released last week showed.

Manufactured products, which have an overwhelming weighting of 64 per cent in the WPI, saw prices falling by 0.42 per cent in May. The April numbers were missing, but inflation in this category remained below 1 per cent since January this year. In fact, these items saw deflation of 0.25 per cent in December 2019.

This reflected weak demand in the economy. The index of industrial production declined 55.5 per cent in April. The purchasing managers’ index (PMI) for manufacturing contracted to 27.4 points in April, a record low. It improved only a bit to hit 30.8 points in May. Any figure below 50 points means contraction.