Inflation Drops to Five-Year Low on Fall in Fuel, Food Prices - NDTV

New Delhi: In a big boost to the Narendra Modi government, wholesale price inflation eased to a near five-year low of 3.74 per cent in August. A sharp fall in food and fuel prices helped cool inflation, data shows.

High prices was one of the big factors for the rout of the Congress-led UPA in the elections held in May. PM Modi's government has consistently said that tackling high food prices is its top priority. (Read: Food Inflation Top Priority, Says Jaitley)

Food prices cooled off sharply on the back of a drastic fall in vegetable prices including onions, which dropped nearly 45 per cent year-on-year. As a result, food inflation eased to 5.15 per cent against 8.43 per cent in July.

Fuel prices also came off sharply tracking a fall in global Brent crude prices, which is now trading at a two-year low. Petrol prices were cut thrice in August, helping bring down fuel inflation to 4.54 per cent in August against 7.40 per cent in July.

Analysts expect fuel inflation to cool further if the government cuts diesel prices today. There are expectations that diesel prices may be cut for the first time in seven years on Monday as under-recoveries on selling diesel at below market cost have nearly disappeared. (Read: Diesel Prices May be Cut amid Sharp Correction in Brent Crude)

The sharp drop in wholesale inflation comes just ahead of the Reserve Bank's scheduled policy meet on September 30 and raises expectations of a rate cut, which will bring down interest rate on auto and home loans.

But analysts do not expect the central bank to cut interest rates just yet. That's because the central bank uses the consumer price inflation to set interest rates.

Though consumer or retail inflation also edged down to 7.8 per cent in August from 7.96 per cent a month earlier last week, they are still hovering around the Reserve Bank's inflation target of 8 per cent by January 2015.

DK Joshi, senior director & chief economist at CRISIL, says the RBI will watch the inflation trend for a few months before taking any decision.

Indian stock markets did not react to the sharp fall in WPI. The Sensex traded 200 points or 0.7 per cent lower at 26,860 as of 1 p.m. (Read:Sensex Unmoved by Inflation Data)

(With Reuters Inputs)