India’s Wholesale Price Inflation Slows as Fresh Harvests Ease Food Costs

India’s wholesale price index (WPI)-based inflation eased to 2.31% in January, down from 2.37% in December, driven by a decline in food prices, particularly vegetables, according to provisional data released by the Commerce and Industry Ministry on Friday.

The drop in WPI inflation was largely expected, with experts anticipating lower food prices due to fresh harvest arrivals. A Reuters poll of economists had projected wholesale inflation to rise to around 2.5% in January.

Food prices, which form a major component of the WPI, increased by 7.47% in January, moderating from 8.89% in December. Vegetable prices, though still high at 8.35% year-on-year, saw a sharp decline from the 28.65% surge in December.

Cereal prices rose to 7.33% in January, up from 6.82% in December, while pulses saw a slight increase to 5.08% from 5.02% in the previous month. Food prices have remained elevated over the past year, primarily between November 2023 and June 2024, due to erratic and below-normal monsoon rains.

Correction in food inflation helped wholesale inflation ease to 2.3% in January. This was further aided by a sustained decline in fuel and power prices, said Paras Jasrai, Senior Economic Analyst at India Ratings and Research.

However, not all sectors saw a decline. Prices of non-food articles and energy & minerals recorded an increase. Non-food articles rose to a two-year high of 3%, while energy & minerals prices increased by 0.6% year-on-year after four months of decline.

Manufactured products, which account for about 64% of the WPI, saw inflation rise to 2.51% in January, compared to 2.14% in December.
Fuel and power prices fell 2.78% year-on-year, following a 3.79% decline in December.

Inflation in manufactured goods remained subdued, rising to 2.5% due to an unfavorable base effect from the previous year. Meanwhile, deflation in the fuel and power sector continued for the sixth consecutive month, said Rajani Sinha, Chief Economist at CareEdge.

On the external front, Brent crude oil prices remained stable, but industrial metals inflation turned positive in January, rebounding after six months of deflation.

India’s retail inflation (CPI) also saw a decline, falling to 4.31% in January, down from 5.22% in December and 5.48% in November.
In response to easing inflation, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) last week lowered the repo rate to 6.25%, marking the first rate cut since the COVID-19 outbreak in 2020. The RBI targets a medium-term CPI inflation rate of 4%, within a band of +/- 2%.

Regulating interest rates is a key tool for the central bank in controlling inflation. Higher interest rates make borrowing costlier, reducing demand and ultimately curbing inflationary pressures.