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July WPI worsens to -4.05%, rate cut hopes up

The July Wholesale Price Index (WPI) contracted for ninth straight month to -4.05 percent against -2.4% in June on account of easing commodity and food prices.

TheNewsInternational Team

The Wholesale Price Index (WPI) contracted sharply year-on-year in July to touch -4.05 percent against a drop to -2.4 percent in June, thereby worsening the deflationary trend on account of easing commodity and food prices. The July number, which marks the ninth straight month of fall, was greeted by the street as out-of-turn rate cut expectations strengthened. 

The consumer price index (CPI) data, which was much better than what the street was expecting had already raised expectations that the Reserve Bank of India (RBI) could move even before the policy date of September 29.

Cost of manufactured products (the index has 65 percent weight on the WPI basket) declined to -1.47 percent in July after registering a 0.77 percent drop in the previous month. It is a key core inflation data that indicates how businesses are faring.

Food Articles inflation declined to -1.16 percent versus 2.88 percent (MoM) in the WPI basket. In particular, year-on-year vegetable prices slumped to -24.52 percent against an annual fall to -7.07 percent in June. The CPI data too had shown sharp decline in vegetable prices (8 percent) which had pulled down food inflation. While Food Articles Index slipped by 0.6 percent, non-food articles index slumped 1.3 percent.

Cost of primary articles fell to -3.66 percent year-on-year versus -0.76 percent in June and Fuel, Power Group inflation declined to -12.81 percent year-on-year against -10.03 percent in the previous month.

Experts on rate cut

Vivek Rajpal of Nomura India believes though chances of a rate cut have gone up, the RBI may be willing to wait until its next policy meet since important developement like yuan devaluation has taken place and talks of Fed rate cut have gathered momentum.

Rupa Rege Nitsure, chief economist at L&T Fin Holdings sees interest rate cut happening in the third quarter, as she does not think the RBI will move out of its cautious zone choosing to wait for the actual impact of waning of statistical base. Nitsure, however, doubts if a rate cut will be enough to kick-start the economy or give any momentum to the real sector activity.

Aditi Nayar, Senior Economist, ICRA sees room for a 25 basis point cut in the repo rate in 2015 and agrees with Nitsure on its effectiveness in pushing structurally troubled sectors like power.

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