WPI inflation hits 14-month high at 7.52%

Tags: Economy

Sharp rise in prices of onions and 10 other items drives index

WPI inflation hits 14-month high at 7.52%
Inflation in November rose to 7.52 per cent, the highest in 14 months, tying RBI’s hands further. RBI may have to increase the repo rate by 25 basis points to 8 per cent when it reviews the money policy on Wednesday.

The rise in wholesale price inflation comes on the back of a 11.23 per cent increase in retail price inflation in October and an 1.8 per cent drop in industrial output in November.

But the good news is that economists expect some moderation in prices in the next few months.

Finance minister P Chidambaram refused to take questions on inflation at a news briefing held on the Nirbhaya fund on Monday.

Two others who help guide government policy, C Rangarajan and Montek Singh Ahluwalia, maintained silence.

Inflation as measured by the wholesale price index was 7 per cent in October and 7.24 per cent in November last year.

As per a Yes Bank analysis, food items contributed 48 per cent of the wholesale price spike last month. This time manufacturing and energy sectors are also big contributors.

“This is significantly uncomfortable. It’s a stagflation kind of a situation, or I would say an economy on decline,” said Shubhada Rao, senior president and chief economist of Yes Bank.

On a possible rate hike, Rao said, “We expect a 25 basis points hike in repo rate. But RBI governor has very little room to increase rates further.”

In November, onions became dearer by 190.34 per cent, vegetables by 95.25 per cent, and potato by 26.71 per cent than they were a year ago. Wholesale prices of at least 10 other major commodities, including rice, wheat, fruit, egg, meat & fish, soared by double digits. Only a handful of items in non-food category like cement, basic metals and iron became cheaper.

Most economists expect a policy rate increase – something industry is wary of. CII director-general Chandrajit Banerjee said, “The increase in inflation should not come in the way of an accommodative monetary policy.”

Industry watchers also think any increase in interest rates will adversely impact investor sentiment.

Crisil cautioned that inflation, till now limited to food items, may accelerate in manufactured items. The agency also projected a 25 basis points increase in key policy rate.

“The spike in vegetable prices continues to dominate food inflation. The pace at which vegetable prices correct will impact food and headline inflation as well as inflationary expectations” said Aditi Nayar, an economist with Icra.

Indeed, the bad news lately on the price front and the industrial sphere has forced may economists, who earlier advocated rate cuts, to now seek an increase in the repo rate.

If RBI does increase the repo rate as expected, it will be the third such increase since the start of September when Raghuram Rajan took over as the central bank’s governor. Rajan met the finance minister on Monday ahead of the mid-term policy review.

Some other analysts expect RBI governor to tinker with the marginal standing facility rate, a key overnight lending rate, by 25 basis points to 9 per cent, leaving the cash reserve ratio unchanged at 4 per cent.

The finance minister wants to limit the fiscal deficit at 4.8 per cent of GDP this year to send a signal to investors that the government is set to spruce up macro-economic data and control inflation. But this seems more and more difficult.

Rating agencies have repeatedly warned that India's investment grade could be lowered if steps were not taken to cut the fiscal and current account deficits.

badarinath@mydigitalfc.com

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