What Deflation could lead to?

June 19, 2009

The rate of inflation, as measured by the wholesale price index, has turned negative for the first time in three decades. The widely watched WPI fell to -1.61% in week ended June 6. This makes India possibly the only country with a negative inflation rate, though a number of European countries are nearing zero levels.

But unlike in Europe, where demand has been contracting, India isn’t facing a deflation as industrial output remains positive and the inflation rate measured by the consumer price index (CPI) still stands around 8% and shows no signs of a let-up.

Bankers are divided over whether a negative inflation rate will prompt the RBI to cut its benchmark policy rates. With negative inflation, real interest rates (net of inflation) in the money market are high.

Source: Timesof India