Bets split on inflation trend

After 11 rate hikes in the last 17 months, is the war on price-rise near victory?

Experts are divided.

Most economists hope that the wholesale price index-based inflation number, which stood at a stubborn 9.22% in July, will come off below 8% by December, primarily due to a statistical base effect.

But there are others who feel prices remain stickily high.

“The worry is that the acreage of foodgrains is still below last year’s levels though total acreage has improved. Our analysis suggests that if foodgrain acreage does not improve, we may not see the expected degree of softening in inflation in November-December,” economists Indranil Pan, Suvodeep Rakshit and Shubhra Mittal of Kotak Mahindra Bank wrote in a note on Friday.

Rohini Malkani and Anushka Shah, economists, Citigroup Global Markets, said in an earlier note that prices will remain elevated due to three factors — upward revision in minimum support prices for crops (which set the floor for market prices), continued upward revisions to past inflation data, and relatively higher commodity prices compared with last year.

They believe inflation will be averaging 9-9.5% for the current fiscal with the March reading likely at 8%, a 100 basis points above the Reserve Bank of India’s revised estimate of 7%.

Some economists feel the pace of rise in inflation has slowed and it would continue to decelerate further. “As long as that continues headline inflation will moderate,” said A Prasanna, chief economist, ICICI Securities. He expects it to be around 9% till October before it comes off.

“The deceleration will be around 90 basis points in December,” said Sachchidanand Shukla, chief economist at Enam Securities.    

“Base effect will drive it. Going forward you will see manufacturing articles prices remaining steady and unless fuel price hike happens again, prices should moderate,” said Shukla.

The other crucial issue is a good harvest.

“That will douse agriculture inflation (and inflation) by late 2011,” said Indranil Sen Gupta, economist, Bank of America-Merrill Lynch in a note on August 21.

Sen Gupta is also of the view that this should allow the RBI to pause after a final 25 basis points September policy rate hike (unless the US double dips into a recession in between).