In what may help the United Progressive Alliance score brownie points ahead of general elections in April-May 2009, the WPI-based inflation rate is likely to drop to 2 per cent or even less by March 2009-end. But low inflation and a lower-than-expected moderation in growth rate may not help the domestic economy.

RBI governor D Subbarao today said the inflation rate could be significantly below the previously estimated 7 per cent by the end of the current fiscal. The cut in fuel prices itself will result in a decline of 40-45 basis points. For the week-ended November 22, the inflation rate had dropped to 8.4 per cent from 8.84 per cent in the previous week. But economists said the sharp fall in the prices of global commodities, such as steel and cement, was not yet fully reflected in India.

Contraction in demand which is largely a result of the global meltdown, coupled with rapidly falling international commodity and fuel prices will pull down inflation. Siddhartha Sanyal, economist with Edelweiss Securities, said India had not yet felt the full-blown impact of the sharp fall in commodity prices globally, which makes the case for a possible sharp decline in prices soon. “So far, we’ve only seen a 5-6 per cent correction in commodity prices here, whereas globally, prices have seen a much sharper fall of 30-35 per cent,” Sanyal said. Edelweiss released a report on inflation in November which estimated inflation would have dropped to 5 per cent by end of March 2009. Speaking to a news channel earlier today, A Prasanna, chief economist of ICICI Securities, too had said inflation could fall to as low as 2 per cent by the end of March.

... contd.