What Is The Economic Impact Of Negative WPI Inflation? Experts Advise This

Due to lower costs for food, gasoline, and manufactured goods, the WPI, or Wholesale Price Index, based inflation in May 2023 fell to a seven-and-a-half-year low of (-) 3.48 percent. This is the second month in a row that the wholesale inflation rate has been negative.

The government statistics, which the RBI MPC uses to determine monetary policy, showed retail inflation decreased to a 25-month low of 4.25 percent in May. The WPI was released only a few days later.

Since it was (-) 3.7% in November 2015, this is the lowest WPI inflation print. The WPI inflation rate was 16.63% in May 2022. It was (-) 0.92 percent last month.

What Does A Low WPI Indicate?

A negative WPI inflation, sometimes known as deflation, indicates that wholesale prices have been declining overall year over year. The retail inflation data often shows the drop in the WPI-based inflation rate with a lag. Thus, it is anticipated that retail inflation would decline even further in the next months.

“The drop in wholesale prices by 3.48 percent for May 2023 is a pointer towards a decline in retail inflation in the coming months,” Assocham Secretary General Deepak Sood said. “Once the bulk or mandi rates start reflecting in the CPI after a lag.”

He continued by saying that the downward trend in wholesale pricing should lower the value chain’s total input costs. While the trend is anticipated to continue, we must keep an eye on how the monsoon develops since rains have a far greater impact on food costs than they do on the pricing of manufactured products.

“A deflation in WPI in 1QFY24 (as indicated by the latest trends) would lead to the nominal GDP growth coming out to be closer to real GDP growth,” said Paras Jasrai, senior analyst at India Ratings and Research. It’s still quite likely that in 1QFY24, nominal GDP growth will be lower than real GDP growth. In the short run, the WPI deflation would also contribute to keeping retail inflation close to the MPC objective of 4% (CPI inflation: 4.25% in May 2023).

In its study, ICRA said that “the YoY deflation in industrial raw materials widened sharply in May 2023, which should augur well for the margins of India Inc.”

In light of declining inflation, the RBI maintained the benchmark repo rate at 6.5 percent in its review of monetary policy last week.