India may see deflation in '09-10: Bankers

MumbaiIndian economy may go into deflation by the second quarter of financial year 2009-10 as there are fears of inflation going below zero per cent in the face of unprecedented fall in crude and commodity prices.
"If the current pace in inflation-decline continues, the figure (in WPI-based inflation) may slide below two per cent by end-fiscal," HDFC Bank's Deputy Head of Treasury, Ashish Parthasarathy, said, adding "it may fall further to below zero per cent by Q2 FY10."
Inflation almost halved to a nine-month low of 6.61 per cent from this year's peak of 12.91 per cent, giving more space to the RBI to signal further cuts in interest rates.
Deflation occurs in an economy when the negative inflation prevails for a long period. In the event of deflation, the Reserve Bank will have to enhance money supply and lower rates further "to support inflation", IDBI Gilts' Economist, Amol Agarwal said.
Citibank India's Chief Financial Officer, Abhijit Sen, echoed this view saying that the rapid decline in the headline inflation is likely to continue in the coming months.
"In my view, deflation is a remote possibility in this economy. However, if the inflation continue to fall to much lower levels, this would have an impact on the profitability of banks, as it would affect the credit demand," Sen said.
The sharp decline in inflation has given a headroom for the Reserve Bank to slash its reverse repo rate by 0.5-1 per cent, he said.Source: Indian Express