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Close To Zero, Food Items...

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Inflation eased to 0.18 per cent, a new low in over 30 years, although vegetables cost 25 per cent more than it did a year ago and so did other food items — making it a political scoring point in Parliamentary polls underway from today.

Inflation fell by 0.08 percentage points during the week ended April four against 0.26 per cent in the previous week, but a number of food articles such as pulses, cereals, processed fish, common salt, tea, coffee, tobacco, soft drinks and liquor turned dearer, besides vegetables.

"Prices of food items like pulses have remained high because of poor harvest. Some odd categories like vegetables are seasonal. They have gone up by 25 per cent. Vegetable prices are quite volatile. They will correct themselves very quickly," Crisil Principal Economist D.K. Joshi said.

Vegetables turned dearer by 24.9 per cent and oil cakes by 2.4 per cent on a weekly basis. However, year-on-year processed fish was expensive by 42.75 per cent, liquor by 25.41 per cent, tea and coffee by 14.44 per cent, pulses by 9.12 per cent and cereals by 9.45 per cent.

As wholesale price-based inflation drew towards zero, RBI could be in a dilemma to cut policy rates or not in its annual monetary policy next week as food prices went up by 1.2 per cent on weekly basis and 7.29 per cent on yearly basis, but analysts expect the central bank to reduce key rates.

"Low inflation provides room for rate cuts and the RBI should and would certainly cut rates, which is healthy for revival," Nagesh Kumar, Director-General with economic research institution RIS, said. Reserve Bank Governor D. Subbarao recently said the main policy objective of the central bank in the current global crisis is to arrest the moderation in economic growth and restore the eroded market confidence.

Joshi said, " (The) RBI will cut rates anyway to prop up growth. The rate cut is certain and it will happen in the policy." The RBI is scheduled to come out with its annual monetary policy on 21 April. The industry, which is facing a slowdown, has been demanding further cut in interest rates. Industrial production also contracted in February by 1.2 per cent. Joshi added that inflation will move into the negative territory within a couple of weeks.

"Although higher price pressure from primary articles and fuel price indices have kept inflation in the positive terrain, I think it is only a matter of time for inflation to dip to negative," said Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai. "We still expect rate cuts from the Reserve Bank of India by June 2009, and repo rate could go down to 4 per cent while the reverse repo rate may be at 3 per cent."

The central bank has cut its main short-term lending rate by 400 basis points in five moves since October, and the central bank has called on banks to pass the lower rates on to customers.

The wholesale price based-inflation rate has fallen sharply since peaking at just under 13 per cent in August, but annual consumer price inflation in February was 9.63 per cent, as prices of food products remain firm.

Some analysts said the annual inflation rate masked a strong trend in price pressures over the past few weeks. "The index has increased significantly on a week-on-week basis, which means the pressure emanating from primary articles prices, especially vegetables, fruit, edible oil, are exerting significant upward pressure on the wholesale price index," said Rupa Rege Nitsure, chief economist at Bank of Baroda. "Though on a year-on-year basis because of the high statistical base we are seeing a continuous drop in inflation, the spike in prices week-on-week is pretty high."

However, RIS's Kumar said inflation might not go into the negative zone, as the Indian economy has seen the worst and recover in six months, fuelling inflation.

The decline in inflation was mainly due to higher base effect and falling prices of some manufactured products like metals. The inflation stood at 7.71 per cent in the year-ago week. However, jet fuel, naptha and other fuel items were dearer during the week.