A repo rate hike in the Reserve Bank of India’s October 29 policy meet is all but given after inflation, both headline and retail, surged sharply in September.
Headline inflation, or inflation as measured by the wholesale price index (WPI), on Monday weighed in at a seven-month high of 6.46% – rising for the fourth straight month – led by persistently higher vegetable and fuel prices.
Retail inflation, as gauged by the consumer price index (CPI), also reversed its declining trend to hit a near-double-digit mark. After having fallen from 9.64% in July to 9.52% in August, it rose to 9.84% on-year in September.
Prices of primary articles, which have a 20.12% weightage in the WPI index, reported a 13.54% rise as food prices surged 18.4% – the biggest jump in 38 months.
Onion prices went up 323% on-year and 22.66% on-month, while vegetable prices rose a whopping 89.37% on-year.
Fuel prices, too, reported a 10.08% rise on-year, led by a 20.13% rise in the price of high speed diesel and a 9.64% rise in petrol prices.
A Prasanna, chief economist at ICICI Securities Primary Dealership, said both the inflation numbers have come in higher than expected. “Though the food inflation was expected to be higher, the worrying part is that core or underlying CPI inflation, too, has gone up,” he said.
Core inflation rose 2.1% in September, compared with 1.9% in August, as input costs rose because of rupee depreciation.
Going forward, experts see food inflation cooling off a little, though overall, inflation is expected to remain on the higher side.
“The trajectory for diesel and fuel prices has been upwards and is likely to remain so over the next few months, given the sharp rupee depreciation in the second quarter will manifest itself with a lag. Also retail inflation which is more important has remained higher due to higher food prices,” said Sachidanand Shukla, economist at Axis Capital.
Dhananjay Sinha, head - institutional research at Emkay Global Financial Services, feels that a fading out of favourable base effect from October and a likely consumption boost ahead of the upcoming elections are expected to aggravate inflation further.
This, in turn, will prompt the RBI to hike repo rates by 25 basis points (bps) this month-end, said Sinha.
The rural consumer price index in September inched up to a six-month high of 9.71% from 8.93% in August even as urban inflation eased to 9.93% from 10.32%.
Shukla, too, foresees a repo rate hike of at least 25 bps over the next few months.
“The new RBI governor has made it pretty clear that he would be looking at both retail inflation and headline WPI inflation while making policy decisions. Also, with the US Fed tapering likely to start whenever the data suggest a recovery, the RBI cannot afford to loosen the rupee defence and hence will have to keep rates higher,” said Shukla.
Prasanna, on the other hand, does not rule out further rate hikes going forward.
“I expect the repo rate to be hiked to 8% eventually with a 25 bps hike in October followed by another one in December,” he said.