New Delhi: Ahead of the quarterly monetary policy review, the headline inflation based on the wholesale price index (WPI) for June rose an annual 9.44% driven by higher manufactured goods and fuel prices, increasing the chances of the Reserve Bank of India (RBI) raising the policy rates in order to curb inflationary pressures.
The industry department, which releases the data, on Thursday also revised the inflation rate for April to 9.74% from the provisional figure of 8.66%. The revised rate for April indicates that the final inflation figure for June could breach double-digits.
The higher level of inflation was driven by rising manufacturing product prices such as beverages, tobacco, transport equipments and wood products. The manufacturing index in the WPI basket rose by 7.43% as against 5.62% during the same month a year ago.
During the month, food inflation rose by 8.38% compared to 20.97% during the same month a year ago while the fuel group index increased by 12.85% in June as against 13.92% a year ago.
The government raised prices of diesel, cooking gas and kerosene last month to cushion its finances and provide relief to oil companies reeling from revenue losses on state-set fuel prices amid high global crude prices, adding to inflationary pressure.
“Today’s inflation data will force the RBI to continue with its tightening but given the signs of slowdown in certain interest rate sensitive sectors they will settle for a 25 bps (basis points) increase instead of front loading the rate hikes,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
The central bank chief last week voiced concern about sharp revisions in macroeconomic data, including growth and inflation figures, which he said could disrupt calculations when setting policy.
“I am suspecting that this number will also get revised upwards as we had seen a very sharp increase in food, fuel and mineral prices in the month of June,” Nitsure said.
The benchmark 7.80% 2021 bond yield rose 3 bps to 8.29% following the sharp upward revision in April inflation data. The 5-year overnight indexed swap rates rose 6 bps to 7.56% and 1-year was 9 bps higher at 7.96%.
The June PMI for manufacturing and the industrial output growth for May dropped to nine-month lows, indicating a soft patch in the economy, but that is unlikely to deter the RBI from raising rates at the 26 July policy review.
The RBI has raised rates 10 times since March 2010 and is widely expected to raise rates by 25 bps this month.
Goldman Sachs estimates that the direct impact of the hike in fuel prices would be about 60 bps and the overall impact on inflation would be around 90 bps.
Diesel, cooking gas and kerosene comprise 6.4% of the WPI basket and 70% of the fuel component of the WPI.
Most analysts expect the RBI to go through with a 50 bps hike this year that will take the repo rate to 8% before it pauses.
Reuters contributed to this story.