Deflation in India ...Really?

India's inflation rate slipped into negative terrain for the first time in last 35 years. Annual inflation rate declined to -1.6% for the week ended June 6, 2009 as compared to 11.7% during the corresponding week last year.

Now, what does this mean? Should we call it deflation or disinflation or something else? To my mind these numbers have only statistical significance. I don’t think India is facing deflationary pressure at all. In fact, prices for certain commodities have gone up very sharply off late. Mainly, it’s the high base effect which has forced inflation into the negative zone.

Another important thing to notice is that Inflation in India is based on wholesale price index (WPI) unlike most countries which follow consumer price index based inflation. The wholesale price index (WPI) takes into account the wholesale prices of commodities whereas the consumer price index (CPI) considers prices of goods and services at the retail level.

So if we go by CPI-based inflation rate like most other countries do, inflation in India is still ruling firm at near double-digits in light of high food prices. Annual inflation measured in terms of consumer price index (CPI) stood at 8.7% in April’09.

Secondly, if we calculate WBI-based inflation on a monthly basis, it becomes crystal clear that inflation has been picking up for last three months. Going forward, I expect inflation to pick up sharply around Sep-Oct’09 once the base effect dies its own death.

I don’t think RBI need to cut its key interest rate going forward as it has already brought it down by 425 basis points since October’08. Let me know whether you agree with me or not and if not why so?