A surge in wholesale inflation, coupled with a sustained rise in retail inflation, has raised the possibility of another interest rate hike by the Reserve Bank of India. The core inflation (reflecting mainly prices of manufacturing goods) also rose to 2.6 per cent in October from 2.1 per cent in September.

On Thursday, the Wholesale Price Index (WPI) for October rose to 7 per cent from 6.46 per cent in September. Though this is an eight-month-high, it is lower than in October last year, when it was 7.32 per cent. On Tuesday, the retail inflation, represented by the Consumer Price Index (CPI), had risen to 10.09 per cent in October from 9.84 per cent in September.

As with retail inflation, costlier vegetables, especially onion, and food articles are to blame for the wholesale price surge.

While Planning Commission Deputy Chairman Montek Singh Ahluwalia termed the current inflation level as ‘uncomfortable’, India Inc said the Government needs to remove supply-side bottlenecks and plug leakages in distribution to rein in prices.

Supply chain

“I think it clearly remains uncomfortable because of food inflation. Core inflation is still quite modest. I think the food inflation must come down,” Ahluwalia told reporters here.

At the same time FICCI President Naina Lal Kidwai said, “Rising food prices continue to put pressure on overall inflation, which makes it imperative to address the supply-side bottlenecks at the earliest.”

Echoing the same sentiment, CII Director-General Chandrajeet Banerjee, said, “The high food prices call for urgent steps to increase the efficiency of the food supplies chain through appropriate policy responses to cut down on intermediaries and reduce waste.

At the same time, it is of utmost importance to improve the productivity of agriculture.” On Wednesday, RBI Governor Raghuram Rajan had described food inflation as ‘worryingly high’ and had hoped that the price situation will improve once the impact of the new crop is felt in the market.

Fuel worries

But economists fear other factors will offset this. Said Sonal Verma of brokerage Nomura: “Domestic fuel prices remain suppressed and the release of this suppressed inflation (especially in diesel) will continue to drive fuel prices higher. Also, manufacturer margins remain under pressure and hence the risk of further pass-through of higher input prices to output prices, that is, higher core WPI inflation, is likely. Hence, even as food prices ease, we expect higher fuel and core inflation to push overall WPI inflation higher to a 7.0-7.5 per cent year-on-year range in the coming months.”

Verma also said that the RBI’s increased focus on CPI inflation and Governor Rajan’s comment that the fall in core CPI inflation in October was “heartening” suggested that the RBI may not hike rates in successive reviews.

“However, underlying inflationary pressures still remain and we continue to expect a 25 basis point (0.25 percentage point) repo rate hike by March 2014 — most likely at the January meeting,” she said.

Taking a similar line, Crisil Research said that with rising inflation and the RBI now expecting the WPI to be higher than its earlier forecast of 5.5 per cent in 2013-14, a hike of 25 basis points in the repo rate is likely during the remaining months of the fiscal.


(This article was published on November 14, 2013)
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