The Wholesale Price Index (WPI) for November has come in at 0%. The last time WPI inflation was so low was as far back as July 2009, when it was minus 0.3%. Back then, the low inflation was on account of the global recession that followed the Lehman Brothers debacle and the bursting of the housing and derivatives bubble in some of the advanced economies. With inflation so low in 2009, what was the Reserve Bank of India’s (RBI’s) response?

Well, RBI had started cutting its repo rate from October 2008, when it was lowered from 9% to 8%. Thereafter, rate cuts followed rapidly one after the other and in April 2009, the repo rate was lowered to 4.75%. That was the policy rate prevailing in June and July 2009, when WPI inflation dipped briefly into negative territory. So in July 2009, with WPI inflation at minus 0.3%, the repo rate was at 4.75%. Currently, with WPI inflation at 0%, the repo rate is at 8%.

Of course, the periods being compared are very different. In 2009, the government was readying a huge stimulus programme that brought growth back to the Indian economy, but at the cost of double-digit inflation. Indeed, by March 2010, WPI inflation rate was at 10.4% and RBI raised the repo rate to 5%. This time, no such stimulus is contemplated and instead, the government is determined to reduce the fiscal deficit.

The nature of inflation, too, was very different in 2009. The chart shows that while there was disinflation in fuel prices in July 2009 too, inflation was much higher in primary articles and food prices than at present. Inflation in manufactured products, however, is higher now than it was then, which seems to show some pricing power.

Should RBI cut its policy rate? The central bank, under Raghuram Rajan, has shifted its focus to Consumer Price Index-based inflation for policy purposes, so the dramatic fall of WPI inflation to zero may not be a deciding factor. Also, inflationary expectations are now well-entrenched because of years of rising prices.

Nevertheless, it’s a fact that although WPI inflation figures in November and in July 2009 are similar, the prevailing policy rates are very different. But that fact may not make much of a difference to RBI policy. Indeed, with the benefit of hindsight, it may well be argued that the central bank was too tardy in raising interest rates in 2009-10.

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