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Inflation hope floats as crude oil drops

Siddharth Zarabi & John Samuel Raja D in New Delhi | October 20, 2008 08:42 IST

The decision by the Union government and the Reserve Bank of India [Get Quote] to infuse Rs 1,25,000 crore (Rs 1,250 billion) into the banking system in the last two weeks alone is unlikely to fuel inflation, say economists, since this infusion will only meet the basic demand and not lead to a spillover. The glass was nearly empty and the infusion may only fill it up.

In addition, commodity and crude oil prices, which have fallen 30-35 per cent from their peak levels in the last few months, are expected to damp inflation.

Ups and downs

  • Record levels of farm production expected this year too, implying stable food prices
  • Measures to keep prices below international levels will continue
  • While year-on-year inflation may rise in the short term, expect it to fall over the next few months

Shubhada Rao, chief economist with Yes Bank [Get Quote], said the prospects of a cut in the retail prices of petrol and diesel, a likely move in the run-up to Diwali and to the elections in five states, "would further deflate inflation pressures".

On the impact of the cash reserve ratio cut, Rao said, "The measures will not have a negative impact on inflation because of lower crude oil prices and cheaper commodities. Demand is expected to be softer."

Oil and metals, which have about 35 per cent weight in the Wholesale Price Index, have fallen off recent highs. The WPI inflation fell to 11.44 per cent for the week ended October 4 and is expected it to be in single digits sooner than anticipated.

Press Trust of India quoted minister of state for finance Pawan Kumar Bansal as saying that he does not expect inflation to increase on account of the recent measures.  "...we are monitoring the situation to ensure that prices do not rise, the productive sector continues to get funds and growth remains sustainable," he said.

"It is the right approach by the RBI," said Subir Gokarn, chief economist with Standard & Poor's Asia Pacific. "This (CRR cut) will maintain stability."

There is a sense of expectation that the RBI, at its review of monetary policy on October 24, may cut the repo rate - the rate at which it lends to commercial banks - given that the overall economic growth rate is going down and the recent poor industrial growth is a cue to lower interest rates.

Saumitra Chaudhury, a member of the Prime Minister's Economic Advisory Council, says the inflation has peaked. "The prices have not been accelerating in the last one and a half months with commodity prices easing."

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