India to have near 0% inflation in H2 of '09

The country is likely to have near zero inflation in certain periods of second half of 2009 on account of economic slowdown and falling commodity prices, says a report by broking house Edelweiss Securities.

Inflation stood at 10.68 for the week ended October 18. "Given the possibility of a further strong softening in commodity prices amidst a marked global slowdown, domestic inflation can be zero or near zero during H2 CY'09," Edelweiss analyst Siddhartha Sanyal in his research report.

The US and the UK have already reported contraction in output and most emerging economies are also likely to be hit in CY09, the report said, adding that the slowdown is likely to soften overall price levels in most economies.

Slowing global industrial production will further weaken the base metal prices, especially after the decline in demand from China. Economic slowdown is expected to significantly cut down energy demand, the report noted.

A softened crude price will mean lower prices of various chemicals, fertilisers, etc. Accordingly, recession accompanied by deflation is a strong possibility in case of several industrial economies, it said.

"India is a large importer of crude oil, chemicals, capital goods, etc; these commodities taken together influence about 25-30 per cent of the overall WPI basket in India," Sanyal said.

Edelweiss used assumptions of modest growth in food prices (about 6 per cent), crude oil price of $60-70 per barrel leading to about 10 per cent cut in domestic petro prices, and about 10 per cent reduction in prices of metals.

"If the recent spike in domestic inflation was dramatic, its fall in the coming months could be even more stunning," Sanyal noted, adding that he expected softening of inflation from the fourth quarter of FY'09.

Source: EconomicTimes