The statistical illusion about inflation finally ended on Thursday, three months after it first went into negative territory. In the week ended September 5, the wholesale prices index (WPI) rose to 0.12% after staying below zero since June 6.
But even the 0.12% rate is misleading, since food prices have continued to rise, as reflected in the Consumer Price Index (CPI), which touched a 10-year high of 11.89% in July. The latest rise in the WPI is also the result of a rise in food prices. Food has a weight of 22% in the WPI.
The betting is that inflation will hit 7-8% by March 2010, prompting the Reserve Bank of India (RBI) to hike interest rates.
Sonal Varma, India economist with Nomura Securities, says that the prices of daily commodities like sugar, fruits, pulses, spices and milk have gone up in the last few months. “Food is the main reason for the rise in inflation. But apart from food, other input components in manufacturing, like minerals and chemicals, have also gone up.”
Deepali Bhargava, economist at ING Vysya Bank, agrees. “Food prices have contributed as much as 40% to WPI inflation in the financial year so far and as much as 45% in the last two months. Inflation was led by food articles… which averaged 13.3% last month,” Bhargava wrote in a note after the WPI numbers were released on Thursday.
“The prices of pulses, sugarcane and other food articles have already shot up dramatically. This, coupled with lower stock releases by countries that are India’s largest suppliers, is bound to push prices even higher,” Bhargava says.
Varma of Nomura says that if the current increasing trend continues, WPI inflation could hit 6.5-7% by March.
She expects the RBI to hike interest rates from the January-March quarter.
Robert Prior-Wandesforde, India economist at HSBC Bank, expects WPI to rise to 7-8% by March as the full impact of commodity price increases feeds through.
“Consumer price index inflation has proved remarkably stubborn and there is a risk of further rises ahead. The RBI governor, Dr D Subbarao, has become more worried about inflation, raising the possibility that the cash reserve ratio of banks…will be hiked before the end of calendar 2009. We are sticking to the view that the first move will come in 2010, but have brought forward the (CRR) hike to the January-March quarter from April-June,” he said.
Bhargava expects “inflation to rise to 7.5% by the end of March. The RBI could get uncomfortable with rising inflation and first raise the CRR by 50 basis points (0.5%) in December and then wait for a while before hiking the repo and reverse repo rates in March-April,” she says. Repo and reverse repo are the rates at which the RBI lends and borrows from banks to manage liquidity in the system.
“Inflation will rise to 6.5-7% by March. However, if demand improves further, there could be some upside risks to inflation. There is also a possibility that commodity prices rise globally. We expect the RBI to start hiking rates from the January-March quarter, with a total of 125 basis points (1.25%) of hikes in 2010,” says Sonal Varma, India economist at Nomura Securities.
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