WPI enters deflation zone, at 34-month low
Financial Express Mumbai|May 16, 2023
WHOLESALE PRICE INDEX (WPI) fell into the deflation zone in April, with the lowest reading since July 2020, at -0.92%. This comes on the back of a broad-based softening of prices and a favourable base effect, according to official data released on Monday.
SURABHI
WPI enters deflation zone, at 34-month low

The latest data gave rise to expectations of further easing in retail inflation, which dropped to an 18-month low of 4.7% in the month, and increased the chances of the current monetary pause to be a prolonged one, if not a pivot itself in the current rate hike cycle.

The movement of consumer price index (CPI), which gauges retail inflation, is influenced by the WPI, although with a lag and not in uniform manner, given the substantial compositional incongruity between the two indices.

The CPI is closely monitored by the Monetary Policy Committee under a medium-term flexible inflation targetting framework, with tolerance band of 4+/-2%.

The latest reading of deflation surprised analysts, even though they were expecting a softening of price pressures at the wholesale level, but they now expect further deflation due to the continued easing of global commodity and oil prices and the base effect.

Hours before the release of the WPI data, Nomura's Sonal Varma and Aurodeep Nandi wrote: "We believe a macro regime shift is underway from high growth-high inflation to low growth-low inflation, which is likely to cause the RBI to pause in the near term, and shift to rate cuts from October onwards. We continue to project 75 bps rate cuts cumulatively in H2FY24."

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