At 6.1%, August inflation quickens to a six-month high

Headline inflation, as measured by the provisional wholesaleprice index (WPI), rose by 6.1% in August, the highest level in the pastsix months, on an uptick in food and fuel prices.

Economists, however, expect the Reserve Bank of India (RBI) to maintain status quo in the mid-quarter monetary policy review on Friday.

A dna poll of 11 economists across banks and brokerages indicated that the RBI may not take any rate action. Since May, the repo rate, or the rate at which banks borrow from the RBI, is at 7.25% and cash reserve ratio (CRR), or the money that banks mandatorily set aside with the central bank, is at 4% of net demand and time liabilities.

CRR has remained unchanged since January 2013.

At 6.1%, the WPI for August was higher than market expectations of 5.8%, said Aditi Nayar, senior economist at ratings agency Icra.

In July, the WPI inflation was at 5.9% while the final figure for June was revised to 5.1%, 30 basis points (bps) higher than the provisional number.

The WPI covers three broad categories: food, fuel and manufactured products. Within the food category, vegetable prices jumped to 15-year high levels, highlighting supply side constraints. On the other hand, core inflation that reflects demand-push inflation fell to over three-and-a-half year low.

For the RBI, keeping policy rates unchanged would be the only option since any action whether reducing or hiking are highly risky, analysts said.

“Core inflation is low right now, but loosening of monetary policy to support growth runs the risk of creating a situation of high generalised inflation as the supply shocks persist,” said Dharmakirti Joshi and Anuj Agarwal, economists at credit ratings agency Crisil.

The agency revised its year-end WPI inflation forecast from 5.3% to 6.2% on Monday, after the release of August data.

Devendra Kumar Pant and Sunil Kumar Sinha, economists at India Ratings, said that hardening inflation would make India’s macroeconomic management more difficult.

The RBI is not expected to hike rates either “as a rate hike would dampen domestic growth prospects”, said Nayar of Icra.

Economists said markets have witnessed two upside surprises – one nasty (inflation) while the other encouraging (industrial production growth of 2.6% in July). External developments may still outweigh domestic concerns, they said.

Raghuram Rajan, the newly appointed RBI governor, had postponed the mid-quarter monetary policy review to a couple of days after the US Fed meeting that is scheduled for today and tomorrow (September 17-18).

Markets believe that the RBI may reshape its policy stance as per any decision on the feared stimulus withdrawal by the Fed’s Open Market Committee.