Inflation contracts: RBI calls for rate cut

New Delhi: Inflation based on wholesale price index (WPI) contracted further at 2.4 per cent in June on cheaper vegetable and fuel prices, continuing the deflationary trend for the eighth month in a row. This has prompted the industry to demand a rate cut to boost the growth. Inflation had contracted by 2.36 per cent in May. However, while the overall inflation was in negative zone, prices of pulses soared by 33.67 per cent in June, onion by 18.54 per cent and fruits by 7.47 per cent.

Industry body Assocham, in a report warned that onion prices may increase further by 10-15 per cent in the rainy season. Inflation of egg, meat and fish  contracted by 2.25 per cent in June and vegetable inflation contracted by 7 per cent. The decline in WPI-based inflation comes a day after the Consumer Price Index (CPI) data showed that retail inflation edged up to eight-month high of 5.4 per cent in June.

“WPI inflation may head into positive territory in the second half of the fiscal year as the positive base effect wanes away, especially if the food prices continue to harden. The expectation of the rate cut has already been dampened by the CPI data released on Tuesday. The food component in the WPI may just reinforce expectations of upside risks in the near period for the policy makers,” said Richa Gupta, senior director, Deloitte India.

Industry bodies asked the RBI to cut interest rate in view of fall in WPI inflation.“The near static price line and benign inflation outlook should propel the RBI to continue with its rate easing cycle in its forthcoming monetary policy to support investment and consumption  demand especially as industrial production has recorded a muted performance and the consumer goods sector has moved into the negative terrain in May after showing promise in the previous month," said apex industry chamber CII, Director General, Chandrajit Banerjee.

RBI, which has cut its rates thrice so far this year, mostly tracks the retail inflation for its monetary policy review, but the industry body on Tuesday said there is a case for rate cut with the wholesale prices showing a continuing deflationary trend. However, it may not be easy for the the Reserve Bank to take such a call based on WPI data as it primarily factors the consumer price inflation, which inched up in June.