Costlier onion and other vegetables pushed up headline inflation for the third month in a row to 6.1 per cent in August,making it difficult for the RBI to cut rate in the monetary policy review due later this week.
The inflation was at 5.79 per cent in July and 8.01 per cent in August,2012.
The highest increase was witnessed in case of onion which reported an increase of 245 per cent year on year.
The price of vegetables in general rose by 77.81 per cent making life difficult for the common man.
The high increase in prices was also seen in other essential food items like rice,cereals,egg,meat and fish.
On the positive side,potato prices declined by about 15 per cent followed by pulses which became cheaper by 14 per cent as compared to August last year.
The food items became costlier by 18.8 per cent on year on year basis.
In case of manufactured items,sugar and edible oils became cheaper by 4.2 per cent and 3.86 per cent respectively.
Overall,manufactured items showed a moderate increase of 1.9 per cent during the month on annual basis.
New Reserve Bank Governor Raghuram Rajan,who is scheduled to come out with his first credit policy review on September 20,will have to take into account the rising inflation while announcing steps to boost sagging growth.
Commenting on the rising inflation,Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan said that it was mainly on account of depreciating rupee but hoped it would come down in the coming months.
“Over the next few months food inflation will start coming down because of good monsoon and that would have an impact on rest of things…we expect the inflation by end of the current fiscal to be around 5.5 per cent”,he said.
Economist with KASSA Siddharth Shankar said,”overall numbers may not let RBI cut rates.”
SUJAN HAJRA,CHIEF ECONOMIST,ANAND RATHI SECURITIES,MUMBAI
“This is slightly more than the 5.5 percent we were expecting mainly due to the pressures from fuel and primary subgroup. I think the RBI won’t act on rates in this meeting despite the higher-than-expected industrial output and inflation. However,I think it will unwind some of its cash tightening steps.”
UPASNA BHARDWAJ,ECONOMIST,ING VYSYA BANK,MUMBAI
“WPI inflation in August was primarily led by the rising food and fuel prices. The impact of food on inflation is expected to fade off in the subsequent months,easing price pressure.
Weak domestic demand will further help in offsetting the impact of high global crude oil prices and weak rupee. However,inflation is likely to hover in the 5.5-6.2 percent range in H2.”
R. SIVAKUMAR,HEAD OF FIXED INCOME,AXIS MUTUAL FUND,MUMBAI
“From a policy-making stand point,we expect RBI to be more objective as manufacturing sector inflation still seems to be contained and they shouldn’t react to the higher food inflation number.
“The RBI would be focusing on the strengthening of the currency on the back of lower geopolitical risks with the Syria situation controlled and potentially the Fed tapering easing off with the new expected chair.”
DEVEN CHOKSEY,MANAGING DIRECTOR,KR CHOKSEY SECURITIES,MUMBAI
“Core inflation has fallen but food inflation is 18.18 percent and that is a problem. Market is interested in knowing that whether rates would come down,but I think it will be a courageous call.
“I am more confident now that RBI would be able to take care of situation but expecting a CRR cut is better.”
SHAKTI SATAPATHY,FIXED INCOME STRATEGIST,AK CAPITAL,MUMBAI
“While rising primary index clearly reflects higher vegetable and onion prices,the fuel inflation have not captured the full impact of recent currency weakness.
“However,consistent moderation in the core inflation indicates the demand pool factors are still subdued. Hence with lower core inflation,expectation of an easing food prices and recent recovery in the rupee would impact the headline figures in a positive way in the coming months.
However,the expected rise in domestic fuel index would be considered as a near term threat.”
RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI
“Headline inflation was expected to spike in August mainly on account of the monsoon effect on perishables like onions and the consistent fuel price adjustment impacting transportation costs. India definitely has entered a stagflationary phase”.
A. PRASANNA,ECONOMIST,ICICI SECURITIES PRIMARY DEALERSHIP LTD,MUMBAI:
“Obviously this leaves RBI in a difficult situation because there is evidence that weak demand is having an effect on pricing power but still overall inflation is quite high on the retail side also. This means inflation expectation will continue to rule high.
“So the issue is current overnight rate at 10.25 percent is too high but also returning to an overnight rate of 7.25 percent may not be an option for the RBI. It is a challenging task for the RBI and communicate it to the market.
“Developments in the currency market suggest that RBI should be in a position to start reversing its tightening measures,however,they have to be careful as market could interpret it as tolerating higher inflation.”
* The partially convertible rupee trimmed gains to trade at 62.78 per dollar from 62.50 before the data.
* The benchmark 10-year bond yield was trading at 8.51 percent after the data from 8.43 percent.
* The main share index turned negative. It was trading 1 percent higher beforehand.
* The 1-year swap rate rose 8 bps to 9.22 percent,while the benchmark 5-Yr swap rate rose 4 bps to 8.35 percent,traders said.
Soaring food prices drive India’s headline inflation to six-month high
(Reuters) – India’s headline inflation hit a six-month high in August,driven by a surprise surge in food prices,hardening the case for central bank governor Raghuram Rajan to keep interest rates high at his first policy meeting later this week.
Food inflation accelerated to a three-year high of 18.18 percent in August,government data released on Monday showed,driving overall inflation to a higher-than-expected 6.1 percent.
Recent government moves to increase fuel prices also spurred the jump in the Wholesale Price Index.
Economists polled by Reuters had expected a headline reading of 5.80 percent,compared with 5.79 percent in July.
Late planting and disruptions in supplies of vegetables and onions due to heavy summer rains have fueled food inflation. Onion prices jumped 51 percent between July and August.
Monday’s data is the last major data point before former IMF chief economist Raghuram Rajan,who famously predicted the global financial crisis,holds his first policy meeting on Friday.
“Developments in the currency market suggest that RBI should be in a position to start reversing its tightening measures,however,they have to be careful as market could interpret it as tolerating higher inflation,” said A. Prasanna,economist with ICICI Securities Primary Dealership in Mumbai.
The higher inflation number dampened market expectations that Rajan would begin to rollback some of the liquidity put in place by his predecessor in a bid to arrest a sharp fall in the rupee since May.
India’s markets reacted badly to the inflation news,with stocks and the rupee trimming gains after the data was released,while bonds moved into negative territory.
By 12:13 p.m. (0643 GMT),the partially convertible rupee was trading at 62.78 per dollar compared with 62.50 before the data.
NO SILVER BULLET
Rajan has already warned he does not have a “magic wand” to deal with India’s economic crisis,but as he has been dubbed “The Guv” by a gushing Indian media,hopes are high he can find a formula to stabilise the rupee,calm inflationary pressure and at the same time spark a revival in economic growth.
Before he reveals his monetary stance,Rajan will have to first deal with the outcome of a pivotal meeting on Tuesday and Wednesday of the U.S. Federal Reserve.
The Fed is likely to announce measures to rein in its massive economic stimulus. Fears of an expected policy tapering have already sparked an emerging market sell-off,contributing to the rupee’s fall to a record low.
The Fed is expected to reduce its $85 billion a month bond-buying programme,but financial markets are uncertain about the extent of the reduction.