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WPI inflation soars on onion prices,dampens rate cut hopes

Inflation at 6.1% in August,markets shed gains after data release

Written by ENS Economic Bureau | New Delhi | Published: September 17, 2013 12:55:20 am

Headline inflation,based on the annual wholesale price index,shot to a six-month high in August,driven by a 245 per cent year-on-year jump in onion,which dampened market expectations that new central bank Governor Raghuram Rajan would ease interest rates to spur growth at his first policy meeting later this week.

Monday’s WPI data,which came in at 6.1 per cent in August compared with 5.79 per cent in July,reiterated that price rise continues to remain a concern,and potentially crimping Rajan’s headroom to ease rates to reverse flagging growth at Friday’s policy review. Also,on watch is the US Federal Reserve meeting on September 17-18 when it might decide to taper its bond-purchase programme.

The data,released by the commerce ministry revised the inflation in June to 5.16 per cent,up from the provisional figure of 4.86 per cent. Food inflation in August soared to an annual 18.18 per cent from 11.91 per cent in July. The rupee,stocks and bonds all pared earlier gains after the data.

Data released late last week showed that retail inflation,as measured by the consumer price index,had slowed for the second month to 9.52 per cent in August from 9.64 per cent in July. The economy grew at 4.4 per cent in the first quarter of 2013-14,the slowest in a decade. The higher inflation number also dashed expectations that Rajan would begin to rollback some of the measures put in place by his predecessor with the aim of arresting the sharp fall in the rupee since May,especially steps to drain liquidity from the banking system.

On a year-on-year basis,onions were up 245 per cent in August,while other vegetables shot up by 77 per cent. Eggs,meat and fish were up nearly 19 per cent. The broad expectation is that food prices would start moderating from October onwards as supplies rise from crops planted after the monsoon season.

Before he spells out his monetary stance,Rajan might have to first factor in the outcome of a key meeting on Tuesday and Wednesday of the US Federal Reserve. Indications are that the Fed is likely to announce measures to cut in its massive economic stimulus. Fears of an expected policy tapering have already led to a sell-off in emerging markets,contributing to the rupee’s sharp fall to record lows. Credit Suisse,in a note after Monday’s inflation data,predicted that Rajan could avoid a hike in interest rates on Friday unless the Fed decisions change his plan. “In our view,anything that suggests he (Rajan) wants to remove these measures would risk undermining the rupee once again.”

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