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India Wholesale Prices Fall for First Time Since 1978



18-june-2009

India’s wholesale prices fell for the first time in three decades, giving the government scope to spend more in next month’s budget to spur economic growth.The benchmark wholesale-price inflation index declined 1.61 percent in the week to June 6 from a year earlier after gaining 0.13 percent in the previous week, the government said today. That’s the first drop since December 1978, according to the central bank’s monthly data.

Inflation’s dip into negative territory has only a “statistical significance” and wholesale-price gains will quicken to 4 percent by March 2010, according to the Reserve Bank of India. Rising energy costs and further fiscal stimulus may stoke inflation to twice the central bank’s target, according to economist Robert Prior-Wandesforde.Faster inflation “will almost certainly put paid to any chances of a further rate cut, which had already diminished significantly given the prospect of an expansionary budget,” said Prior-Wandesforde from HSBC Holdings Plc in Singapore.

Prime Minister Manmohan Singh’s stunning electoral victory last month raised expectations that he will implement policies to promote growth. Finance Minister Pranab Mukherjee, due to unveil next year’s budget in New Delhi on July 6, has indicated more will be spent on roads, ports and a rural jobs program to accelerate economic expansion.

Reversing Policies

That puts the government at odds with the central bank, where Governor Duvvuri Subbarao said last month that it might be time to start thinking about reversing “expansionary” policies. The Reserve Bank’s next monetary policy statement is due to be released in Mumbai in late July.Bonds were little changed after the inflation report, which economists had expected would show a 1.52 percent decline in wholesale prices. The yield on the 6.07 percent note due May 2014 held at 6.63 percent as of 11:54 a.m. in Mumbai, according to the central bank’s trading system.

Inflation has eased from a 16-year high of 12.91 percent in August last year, enabling the central bank to reduce interest rates to record lows to bolster an economy expanding at the slowest pace since 2003. The Reserve Bank of India last cut its key reverse repurchase rate by a quarter-point to 3.25 percent on April 21.The central bank estimates that six interest-rate cuts in seven months and three stimulus packages will provide a combined stimulus worth about 7 percent of gross domestic product to the $1.2 trillion economy.

Raising Rates
Some economists expect the central bank to start increasing borrowing costs by the end of this year or in early 2010, including Tushar Poddar at Goldman Sachs in Mumbai and Sailesh Jha at Barclays Plc in Singapore.Inflation declined due to a “high base effect” and don’t reflect any contraction in consumer demand, India’s Finance Secretary Ashok Chawla said today. The index of wholesale prices rose 232.7 in the week ended June 6, compared with a gain of 236.5 in the same week last year, according to today’s report.

India’s economy is already beginning to show signs that it may be emerging from the worst global slump since World War II.

Industrial production unexpectedly rose in April, increasing 1.4 percent from a year earlier, according to figures released by the statistics bureau on June 12. Economists were expecting a 0.1 percent contraction.An index of composite leading indicators for the Indian economy compiled by the Organisation for Economic Cooperation and Development rose 0.4 point in April from the previous month, the first increase in 16 months.

‘V-Shaped Recovery’
The positive signals come on top of 5.8 percent GDP growth in the first quarter from a year earlier, which matched the pace of the previous quarter and beat the 5 percent median forecast of economists surveyed by Bloomberg News.“Growth expectations continue to rise,” said Jha from Barclays. “We maintain our view that India will experience a V- shaped recovery in GDP growth and inflation during the second half of 2009.” Jha expects the central bank to raise its reverse repurchase rate by 50 basis points in the final quarter of this year.

The Reserve Bank of India looks at other inflation gauges besides the wholesale price index when deciding its monetary stance, according to Governor Subbarao.Consumer prices paid by industrial workers rose 8.7 percent in April from a year earlier, after gaining 8.3 percent the previous month, according to government data.India has four consumer price indices and uses the wholesale price index as the benchmark measure as the other inflation gauges don’t capture the aggregate price picture.

The wholesale price index published today may be revised in two months, after the government receives additional price data. The commerce ministry today revised the rate for the week ended April 11 to 0.96 percent from 0.26 percent.

Source: http://www.bloomberg.com


 
 
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