New Delhi: Inflation based on wholesale prices declined to a three-year low of 7.18 percent in December, but it has failed to provide relief to consumers as retail prices rose to cross the double-digit mark in the same month.
Wholesale price based inflation falling for the third consecutive month is expected to prompt the Reserve Bank to cut interest rates in its forthcoming quarterly review of monetary policy on January 29 to boost sagging growth.
The wholesale price inflation, according to the data, eased mainly on account of fall in prices of manufacturing products and fuel and power.
However, retail inflation rose for the third successive month in December at 10.56 percent, driven by higher prices of vegetables, edible oil, pulses and cereals.
Commenting on inflation numbers, Planning Commission Deputy Chairman Montek Singh Ahluwalia said: "I have seen the numbers. The decline is welcome still I would like to seen inflation even lower. Hopefully it will go down further."
Asked whether the RBI will cut interest rate in the upcoming policy review, he said, "I never comment on RBI policy, let's maintain some mystery about what the RBI would do."
Prime Minister's Economic Advisory Council Chairman C Ranagarajan feels RBI may lower the policy rate later this month.
"There is softening of the headline inflation. Manufacturing inflation has also come down. These indicate a situation in which RBI can stick to policy indications that it has given few weeks ago. Therefore, there is a possibility of making an adjustment in the policy rate downwards," he said.
RBI, which has kept key interest rates unchanged since April, 2012 on inflation concerns, had in its last policy review hinted at lowering interest rates in January review.
The repo rate, at which RBI lends to banks, stands at 8 percent, while the reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, is at 7 percent.
"We stick to our view that RBI is likely to cut the repo rate by 25 basis points at its January 29 policy meeting. However, we do not see this as the start of a long rate cut cycle and expect a total of only 50 basis points cut in the first half as we expect inflationary pressures to re-emerge in the second half," Nomura Economist Sonal Varma said.
Ficci president Naina Lal Kidwai said that decline in inflation should provide RBI some room for a rate cut.
Inflation stood at 7.24 percent in November while in December 2011 it was 7.74 percent.
In the fuel and power category, inflation was 9.38 percent against 10.02 percent in November. Inflation in manufactured products was at 5.04 percent in December against 5.41 percent in the previous month.
Food inflation, as a category, stood at 11.16 percent in December against 8.50 percent in the previous month. Food articles have 14.3 percent share in the WPI basket.
While wheat turned expensive by 23.23 percent year-on- year in December, rice became dearer by 17.10 percent.
Potatoes were costlier by 89.08 percent and onion by 69.24 percent on yearly basis.
Milk prices, however, declined by 5.85 percent, while fruits were down by 5.76 percent. Eggs, fish and meat prices too moderated to 10.18 percent.
With regard to Consumer Price Index (CPI), the vegetables basket in December recorded the highest inflation of 25.71 percent among all the constituents that make the index.