India's WPI Inflation Drops Below 7%, Markets Post Gains

The WPI data released by the government Monday show that inflation decreased to 6.87 percent in July from 7.25 percent in June, touching the lowest level since 2010. Analysts polled by Reuters had expected an annual increase of 7.37 percent.

The headline inflation dropped as food inflation marginally declined from 10.81 percent to 10.06 percent and fuel prices declined sharply to 5.98 percent in July from a month earlier. Food inflation has persistently remained in double digits this year.   

The core inflation rose to 5.44 percent from 4.9 percent a month ago as the manufacturing index, which weighs 64.97 percent, increased 0.6 percent.

Build-up in inflation in this financial year so far is 2.36 percent, compared to 3.14 percent in the corresponding period of the previous year.

Data released by the Ministry of Commerce and Industry show that primary articles, which weigh 20.12 percent on the index, rose 1.1 percent to 218.8 points from the 216.4 points in the previous month. Major contributors to the inflation index in this group were the prices of grams and fish and marine products that have increased 10 percent and 5 percent respectively.

The index for non-food articles group rose 2.9 percent to 199.2 percent in the same period. The minerals index in the primary articles group declined 3.4 percent to 335.8 points from 347.6 in the previous month due to a fall in crude petroleum prices.  However, the prices of phosphorite (40 percent), magnesite (14 percent), copper ore (5 percent), manganese ore, barytes and iron ore (2 percent each) and steatite (1 percent) moved up.

The fuel and power group with 14.91 percent weightage on the index decreased 1.5 percent to 175.5 from 178.2 from June due to the lower prices of light diesel oil (10 percent,) furnace oil (8 percent), naphtha (7 percent), aviation turbine fuel and petrol (4 percent each).  

Under the manufactured products group, food products increased 1.5 percent, oil cakes 9 percent and tea dust (unblended) 5 percent.  

Though the unexpected decline in the inflation index will trigger demands for interest cuts by the RBI. However, analysts feel that the RBI may continue its tight stance as food inflation is stubborn at double digits and core inflation has picked up.

"This data cannot be taken as evidence that inflation is coming down. There are underlying risks. Crude prices have gone up; core inflation is higher, so this fall in inflation may be temporary. We still think it will be premature for the Reserve Bank of India to cut rates," A Prasanna, an economist at ICICI Primary Dealership, was quoted as saying by Reuters.

Reserve Bank Governor D. Subbarao Monday said that inflation was still a concern and indicated that monetary easing would have to wait.

Adding to the worries is the poor monsoon and draught-like conditions that prevail in several states, indicating a possible fall in agriculture production.  The RBI has kept the interest rates unchanged in its past quarterly review saying that interest cut would "aggravate inflationary impulses without necessarily stimulating growth."

The Indian markets reacted positively to the slowdown in inflation as the BSE Sensex and the NSE Nifty picked up gains after the inflation data was out Tuesday.  The BSE Sensex, which hovered between red and green till noon, gained 85.58 points or 0.49 percent to 17,719.32 at 2:20 pm local time.  The NSE Nifty was trading at 5377.65, up by 29.75 points or 0.57 percent.