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Wednesday, February 19, 2020

Inflation up at 7.55% on dearer food,fuel

WPI rises in May by 7.55% from a year earlier; March inflation revised up to 2012 high of 7.69%.

Written by Fe Bureau | New Delhi | Published: June 14, 2012 12:27:00 pm

India’s wholesale price inflation (WPI) rose to 7.55% in May,compared with 7.23% in the previous month,as food and fuel items turned dearer,highlighting persistent price pressure in the economy and complicating the task for the central bank as it reviews its mid-quarterly monetary policy on Monday.

Analysts on an average had expected an annual surge of 7.53% in an FE poll. The government has also revised up inflation figure for March to 7.69% from 6.89%,according to the data released on Thursday. Some analysts still bet on a cut in key policy rates by 25 basis points,as core inflation remains below 5%,while growth in industrial production remained almost flat at 0.1% in April after contracting by 3.2% in the previous month,heaping pressure on the Reserve Bank Of India to adopt a slight tilt towards growth next week.

Prices of food articles rose 10.74% in May from 10.49% the previous month,on soaring rates of pulses,potato and protein-based edible products,showed the data. Prices of vegetables rose 49.43%,led by a 68.10% spurt in potato rates,while pulses gained 16.61%,egg,meat and fish 17.89% and oilseeds 19.18%. Primary articles inflation,with a combined weight of 20.12% in the wholesale price index basket,surged 10.88% in May,compared with 9.71% in the previous month.

Similarly,manufactured products,with a weight of nearly 65%,inched up 5.02% in the last month,compared with 5.12% in April. Prices of chemicals and chemical products rose 6.75%. The fuel and power index gained 11.53% in May,compared with 11.03% in the previous month.

Analysts have cautioned about persistent pressure on food prices as supplies of fruits and vegetables often decline in summer. A sharp depreciation of the rupee against the dollar since March has further pressured imports of key items such as crude and vegetable oil.

The reserve Bank Of India (RBI) in April cut the main lending rate by an unexpectedly sharp 50 basis points for the first time in around three years to prop up the economic growth,but warned of limited scope to reduce the rates further citing “upside risks” to inflation. India’s industrial production contracted by 3.5% in April,manufacturing,mining and capital goods output got stymied by more than two years of monetary tightening to ease inflation.

The fresh surge in inflation,which had showed signs of moderation since December after tripping 9% in each of the first 11 months of 2011,has again brought to the fore the difficult trade-off between growth and inflation. However,falling global oil prices and declining core inflation as well as growth offered the RBI room to adjust interest rates,RBI deputy governor Subir Gokarn said last week.



It is true that the headline inflation though in line with our expectation is still elevated and the upward revision to the March print is massive. But we believe that with core inflation below 5 percent (4.85 percent in our view) and a dramatic deterioration in growth outlook since the last policy,RBI is likely to reduce repo rate by 25 bps to 7.75 percent when it meets on June 18.


This number is below my expectation but I continue with my recommendation for a 50 bps rate cut as that alone will ensure transmission of monetary policy. There is no room left for any fiscal stimulus,so to trigger growth,the RBI has to lower policy rates.


Since core inflation is still below 5 percent,I would expect RBI to cut rates by 25 basis points as that is the key number. There are cost pressures on inflation from rupee depreciation,excise duty increases,but I don’t think that will spill over to the demand side because the demand side pressure are quite weak evident from the manufacturing inflation.


I don’t see this as a reason for any cut ahead by RBI given that pipeline price pressures are intact,overall inflation will remain on the firm side. The market pricing in a cut by RBI next week may be disappointed.


The benchmark 10-year bond yield rose 3 basis points to 8.28 percent from levels before the data,while the main BSE index erased earlier gains to fall 0.2 percent.

The rupee weakened to 55.75/76 against the dollar from around 55.70 beforehand.


– Standard & Poor’s this week said that India could become the first of the so-called BRIC economies to lose its investment-grade status,less than two months after cutting its rating outlook for the country.

– The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75 percent on June 18 when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.

– Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates,a deputy governor said last week.

– Industrial output rose just 0.1 percent in April,lower than expectations in a Reuters poll for a 1.7 percent increase. Output fell in March from a year earlier by 3.5 percent.

– The economy expanded 5.3 percent in the March quarter,its slowest pace in nine years,on a combination of mounting global uncertainties,muddled policies,high inflation and steep interest rates at home.

– Manufacturing sector kept up its steady expansion in May, driven by rising output,a business survey showed.

– Car sales rose just 2.8 percent in May from a year earlier as a hike in excise duty on the vehicles hit demand.

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