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Expect moderation owing to govt measures, favourable base effect

Expect moderation owing to govt measures, favourable base effect
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First Published: Tue, Jan 18 2011. 08 40 PM IST
Updated: Tue, Jan 18 2011. 08 40 PM IST
The decelerating trend in the headline inflation was rudely reversed in December due to rising food prices both on the domestic and global front. Consequently, headline inflation rose 8.43% year-on-year (y-o-y) in December, in line with expectations of 8.4% but higher than 7.5% levels seen in November.
On a sequential seasonally adjusted basis, the Wholesale Price Index was up 2.3% against 0.4% last month.
Also Read Pinching Pockets (PDF)
Highlights
While the base effect was expected to kick in, the rise in the December numbers was mainly due to price rise of primary articles, which rose 16.5% y-o-y (3.5% sequentially). Within primary articles, while prices of milk and meat continue to remain firm, the recent rise was mainly due to fruits and vegetables—a result of unseasonal rains and hoarding. The other two components of the index posted benign trends with the fuel index (up 11.2% y-o-y, 1% sequentially) and manufactured products (up 4.5% y-o-y and 0.4% sequentially).
While manufactured food products rose 0.4%, non-food manufactured products edged marginally higher at 5.4%.
Likely to remain sticky
While measures taken by the government (anti-hoarding, banning exports, etc.) and the favourable base effect could result in moderation of inflation levels to 7.0-7.5% (previous expectation was 6.5%) by March. However, though prices could moderate once supply shocks ease, the composition of food inflation reveals that persistently high prices appear to have a structural as well as cyclical component. This coupled with higher oil prices is likely to result in inflation being sticky at 6.5-7% in FY12 with an upward bias.
Upside risks
We expect the Reserve Bank of India to raise rates by a minimum of 75 basis points in 2011 taking repo and reverse repo rate to 7% and 6%, respectively, by December.
In addition to upside risks arising due to domestic inflation, another factor to watch out is earlier-than-expected G3 tightening. (Our current estimates are that of the US Federal Reserve, European Central Bank and Bank of Japan, all likely to keep policy rates on hold in 2011).
Graphic by Ahmed Raza Khan/Mint
Edited excerpts from a report by Citi Investment Research. Your comments are welcome at mintmoney@livemint.com
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First Published: Tue, Jan 18 2011. 08 40 PM IST