Inflation (as measured by the Wholesale Price Index i.e WPI) today fell to as low as 0.44% (as compared to 2.43% recorded a week ago) something that has not been seen in the last two decades. More importantly, the YoY fall in the weekly Index number was a whopping 199 basis points . Whew.
At the rate the inflation number has been moving, we are all set to touch zero inflation (if not slightly negative) before this month end. Maybe, by next week itself. If the index value drops by 0.3 to 226.4 from the current 226.7, zero inflation will be recorded.
Is that a concern really? Is India headed for deflation?
I doubt. Deflation does not seem to be a concern. In fact, it may be termed as disinflation, rather than a deflation. This is more of a statistical phenomenon as the base effect kicks in big time rather than a situation of a drastic fall in price due to sustained decline in demand. So even if there is a negative inflation for some months going forward, the base effect will start kicking in again and inflation will move back to the positive territory. My hunch is that inflation might remain in negative territory for the next three to four months after which the reversal might be visible. Only if the real economic data takes a turn for the worse (much more than expected) will the specter of deflation loom in the horizon. As of the indications do not point to such worsening of scenario.
What this means is that, inflation will cease to be a problem for us for the next, atleast, six months. On the policy front, this development makes a case for further softening of interest rates.