Sensitive price index weekly inflation index is in the negative zone! This means the price index in the third week of November is lower than what it was in the same period last year. While the wholesale, non-food, price index were already negative for the last two months. Wow, isn it cool?
High base effect, falling global commodity prices and subdued monetary expansion are all responsible for the nose diving inflation. CPI recorded at 5.8 percent in October was its lowest level in 15 months. And its likely to slide further. The way oil prices and SPI index have moved south CPI in November could well be lower than 5 even percent. The yearly average of FY15 would surely be less than 7 percent against the governments target of 7.5 percent.
The high base effect is surely playing its role as monthly average increase was 0.7 percent in FY14 while the full year average inflation was at 8.6 percent. The story is similar for monthly inflation, which averaged at 0.6 percent in Jul-Oct FY15, on the other hand yearly average restricted to 7 percent in the four months. The impact would be similar, if monthly average stays at 0.6 percent, the whole year average would come at 7.1 percent.
But the picture is likely to be even brighter in coming months as global economic slowdown and enhanced hydrocarbon supplies in the US are boding well for prices at home. Its not the butterfly effect rather the normal way an open economy works in todays flat world.
Lower oil prices will have direct impact on CPI on lowering transportation and utility prices and that is already visible in Octobers number and will have a higher impact in November. Then it can trickle down to other goods and services as oil prices are expected to remain depressed for medium term.
This would help lowering the inflationary expectations as well. The inflationary expectations can also be anchored by subdued growth in money supply which is up by a mere 0.7 percent in year to date as against the increase of 2.7 percent in the similar period last year. The breakdown of monetary assets is even more encouraging as the ratio of net foreign assets to net domestic assets has inched up. Empirical evidence suggests that higher the NFA to NDA ratio, lower is the inflation. The ratio is improved considerably in FY14 as foreign flows came in the second half of the year and are expected to improve further this year.
The other element that fuels demand-driven inflation is government borrowing from the banking system, especially the central bank. In FY13 government borrowed Rs1.5 trillion from the system while its incremental borrowing stood at Rs537 billion. Better fiscal management by curtailing deficit and finding alternative avenues is showing in the inflation number. However, the step taken by this government is not sustainable and there is no other way to rein government borrowing than to enhance the tax base.
Plus, the hawkish monetary stance in the last year has its impact on the lower monetary assets growth but its toll is more visible on the drying private sector credit which shrunk to 60 percent in year to date from what it was in the same period last year. The policymakers need to respond by carefully looking at the rising real interest rates, which have the potential to hamper growth momentum!
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