Stubborn Inflation Tilts Scale in Favour of a Rate Hike - India Ratings
Author(s): India RatingsThough Still High, Food Inflation is Likely to Come DownStubborn Inflation: Whole Price Inflation (WPI) inflation increased 7.52% yoy in November 2013 (October 2013: 7.00% yoy) led by a 19.93% yoy inflation in primary...
Though Still High, Food Inflation is Likely to Come Down
Stubborn Inflation: Whole Price Inflation (WPI) inflation increased 7.52% yoy in November 2013 (October 2013: 7.00% yoy) led by a 19.93% yoy inflation in primary food products and 11.08% yoy inflation in fuel and power. Even the Consumer Price Index (CPI) based inflation for October 2013 rose to 11.24% yoy (October 2013:10.2% yoy). India Ratings & Research (Ind-Ra) expects the overall WPI inflation to soften somewhat in the near term due to a decline in food inflation led by a drop in fruits/ vegetables prices. However, it will still be at elevated levels and higher than the comfort zone of the Reserve Bank of India (RBI).
RBI’s Policy Stance: Despite dwindling growth, inflation and inflationary expectations continue to be high. It may push RBI to go for a rate hike and increase the repo rate by 25bp (currently: 7.75%) in the forthcoming review of monetary policy. On the liquidity front, Ind-Ra expects RBI to take a proactive stance and necessary steps including open market operations to ensure adequate liquidity in the system.
Food Articles Drive Overall Inflation: The contribution of vegetables in driving the overall WPI inflation has been rising since June 2013, despite having a weight of 1.74 in the overall WPI basket. Vegetables recorded an inflation of 95.25% and contributed nearly 25.2% to the inflation in November 2013. Within vegetable, onions recorded a staggering 190.34% inflation in November 2013. The onion inflation, though still high, is lower than previous month’s and may decline further as the supply shock fades. Moreover, with the arrival of winter vegetables, the overall vegetable inflation is likely to moderate further in near term.
Agricultural Productivity Still Hold the Key: Ind-Ra believes seasonal factors can have only a short-lived influence on vegetable/food prices so long as structural factors are not addressed. Unlike a decade ago, the importance of cyclical factors in driving food inflation has waned and the key drivers are now structural in nature - declining agricultural productivity, bottlenecks in agricultural supply chain, etc. No wonder, despite two consecutive good monsoons, food inflation has remained at elevated levels.
A case in point is the prices of rice. Despite a bumper kharif harvest this year as well as last year, rice inflation since August 2012 has been in double digits and 15% or higher since October 2012.
Marginal Increase in Manufacturing Inflation: Manufacturing inflation though still low inched up further to 2.64% in November 2013 from 2.50% in October 2013. The manufacturing sector had been struggling now for more than two years due to the sustained weakness in both investment and consumption demand domestically and export demand. The growth in Index of Industrial Production for April-October 2013 has been flat (0.0%). However, Ind-Ra believes that rise in rural spending due to good kharif harvest and some revival in global demand is likely to provide support to the manufacturing demand over the next few months.
Fuel Inflation: Mineral oils and electricity from the fuel group contributed 18.33% and 12.07%, respectively, to the increase in WPI inflation in November 2013. Inflation in mineral oils and electricity in November 2013 was 12.9% and 23.0%, respectively. Although due to favourable geo-political environment and stabilization of INR vis-à-vis USD, Ind-Ra expects the price of Indian crude basket to remain stable, the continued under recovery in petroleum products particularly in high speed diesel still carries the danger of suppressed inflation.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research A Fitch Group Company.)