Oil price decline is the antibiotic for India’s inflation infection

The effects of the dramatic fall in oil prices since June is now beginning to work its way through into cost and inflation statistics. In India, where oil imports are a major burden on both costs and foreign exchange, the impact seems to be killing the persistent inflation virus. The latest government figures for November 2014 have just been released:

The annual rate of inflation, based on monthly WPI, declined to 0.0% (provisionally) for the month of November, 2014 (over November,2013) as compared to 1.77% (provisional) for the previous month and 7.52% during the corresponding month of the previous year. Build up inflation rate in the financial year so far was 0.67% compared to a build up rate of 6.70% in the corresponding period of the previous year.

The most significant contributor has been the cost of fuel:

The index for this major group declined by 5.4  percent to  199.3 (provisional) from 210.7 (provisional) for the previous month due to lower price of furnace oil (13%), high speed diesel oil (10%), aviation turbine fuel (8%), petrol (5%) and kerosene (3%).

WPI inflation has now dropped for 6 consecutive months. Retail inflation is also declining and reached a record low of 4.38% in November. The target was to get it down to 6% by January 2016 and the oil price decline has allowed this target to be met a year in advance. And this in spite of the government raising some of the taxes on fuel to protect their revenues. With industrial growth also down to 4.2% in October the calls for a cut in Reserve Bank rates are increasing.

India is one of the few countries still fighting inflation. Currently growth is running in the 5.4-5.9% range. The Reserve Bank of India is not cutting rates just yet. It will probably wait until the figures for January and February 2015 are out. But the drop in oil prices has provided welcome relief for Indian consumers – even if the inflation virus has not been eradicated.

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