The inflation rate determined by the Wholesale Price Index (WPI) in May has hit a 7.5-year low, recording a decline of -3.48 percent. This reduction was attributed to falling costs of food, fuel, and manufactured goods, marking the second consecutive month of WPI being in the negative. The commerce and industry ministry noted that on a month-to-month basis, the WPI for May fell by 0.86 percent.

In May, food inflation was -1.59 percent compared to 0.17 percent in April, with products such as paddy, cereals, milk, wheat, and pulses contributing to the decrease. Additionally, inflation rates for primary articles shrunk by 1.79 percent while fuel and power inflation reduced by 9.17 percent. The inflation for manufactured products also saw a decline of 2.97 percent compared to -2.42 percent in April.

Despite these downward trends, industry bodies highlight the need to monitor the impact of the monsoon season on food prices. The negative trajectory in wholesale prices is expected to benefit the overall input cost in the value chain. Rating agency ICRA forecasts that WPI inflation deflation might settle between 2.5-3.5 percent in June 2023, aided by a high base from the previous year.

The WPI deflation trend has also been observed in the Consumer Price Index (CPI) inflation, which dropped to a two-year low of 4.25 percent in May 2023. A decrease in WPI inflation during the June quarter could also help maintain the retail inflation close to the Monetary Policy Committee’s target of 4 percent in the short term, according to India Ratings and Research Senior Analyst Paras Jasrai.

WPI’s fall comes as a respite to producers due to reduced input costs, and is expected to eventually lower retail prices. With the WPI seeing a decline for the 12th straight month, the trend is expected to continue, given the favorable base effect. However, this continual decrease could potentially lead to a lower nominal GDP growth in FY24 than the projected 11 percent, signaling potential risks for fiscal slippage as tax revenues might not meet the budget estimate, as per Gaurav Sen Gupta, India economist at IDFC First Bank.

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