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Business News/ Politics / Policy/  Vegetable prices push inflation to 7-month high
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Vegetable prices push inflation to 7-month high

Wholesale, retail inflation rise due to higher vegetable prices, raising chances of interest rate hike

Wholesale food price inflation rose to 18.4% in September, compared with 18.18% in August. Photo: Priyanka Parashar/ Mint (Priyanka Parashar/ Mint )Premium
Wholesale food price inflation rose to 18.4% in September, compared with 18.18% in August. Photo: Priyanka Parashar/ Mint
(Priyanka Parashar/ Mint )

New Delhi: India’s wholesale price inflation accelerated to a seven-month high in September and retail inflation snapped its two-month downward trend in the same month, mainly because of higher vegetable prices, increasing the chances of a rate hike by the Reserve Bank of India (RBI) later this month.

Wholesale price index (WPI)-based inflation accelerated to 6.46% in September from 6.1% in August and consumer price index (CPI)-based inflation quickened to 9.84% from 9.52%. Wholesale vegetable prices increased 89.37%, spurred by a more than four-fold increase in onion prices, while retail vegetable prices increased 34.93% during the month.

Wholesale petrol prices also increased to 9.64% in September from 3.18% in the previous month, while prices of non-food articles, which include fibres, oil seeds and minerals, rose to 5.17% from 1.06% during the period, reflecting the impact of a depreciating rupee. Wholesale food price inflation rose to 18.4% in September, compared with 18.18% in August. Retail food inflation jumped to 11.44% in September from 10.95% in August.

For July, the final WPI-based inflation was revised higher to 5.85% from the provisional 5.79% reported earlier.

The high inflation was driven by food prices, especially prices of cereals, said Montek Singh Ahluwalia, deputy chairman of the Planning Commission.

“For cereals, the government has set up a committee which is working out how to release excess food stocks to control market prices," he said. “It should complete its work in a couple of weeks. Onions were a short-term problem in October; it is cooling off already."

Wholesale cereal prices rose 13.05% in September compared with 14.35% a month ago.

RBI is scheduled to announce its second-quarter monetary policy on 29 October. Even against the backdrop of weak economic growth, some experts expect the central bank to raise the repo rate, or the rate at which it lends to banks, in an attempt to tame inflation.

India’s factory output growth slowed to 0.6% in August after expanding 2.7% in the previous month, data released on Friday showed, suggesting that economic recovery remains tenuous.

The central bank may increase the repo rate by 25 basis points and may bring down the Marginal Standing Facility (MSF) rate at which banks borrow emergency funds from RBI by 25 basis points, said Abheek Barua, chief economist at HDFC Bank Ltd. One basis point is one-hundredth of a percentage point.

“Since the operating benchmark for banks is currently MSF, interpreting that a repo rate hike may lead to increase in cost of funding could be misleading. It is actually not a big deal," Barua added.

It would be too hasty for RBI to hike the repo rate in October after raising it by 25 basis points last month, given that food inflation is expected to start trending down from next month, said Madan Sabnavis, chief economist at Care Ratings.

“If you go for a repo rate hike at a time government is asking banks to lend more in the consumer durable segment, it will send confusing signals and will be counter-productive," he said. Sabnavis said RBI should wait for another month.

In a bid to boost demand for consumer durables and motorcycles ahead of the festive season, the government plans to infuse fresh capital in public sector banks and, in turn, get them to provide low-cost loans, although RBI governor Raghuram Rajan said in an interview last week that the link can’t be as direct as that.

Rajan is using the repo rate as a medium-to-long term signal to curb high inflation, while providing relief to banks by reducing the MSF rate in a tight liquidity scenario (in which it becomes the effective policy rate).

Rajan said in the interview that inflation is the central bank’s primary concern. “But the fight against inflation will take into account the state of the economy," he said.

The International Monetary Fund, in its World Economic Outlook released last week, said that in a number of economies, including Brazil, India and Indonesia, more monetary tightening may well be needed to address inflationary pressure from capacity constraints, which will likely be reinforced by recent currency depreciation.

Since January, the rupee has weakened about 10.64%.

In its first quarter (April-June) review of the economy, the finance ministry said the inflation outlook is likely to be determined by the interplay of commodity prices and the currency as well as the release of suppressed inflation through revisions in administered prices, particularly of coal, mineral oils and electricity.

“Though international commodity prices have generally softened, the domestic prices of petroleum products and other tradable like metals, edible oils and pulses would be affected by the depreciation of the Indian rupee vis-à-vis US dollar," it said.

Estimates reported in the Macroeconomic and Monetary Developments of RBI indicate that a 10% depreciation in the rupee leads to a percentage point increase in WPI inflation.

The finance ministry said in its review that the good monsoon augurs well for lower food inflation in the post-harvest period of 2013-14. “Based on current trends and the wearing of the base effect post October, WPI inflation is expected to be in the range of 6.5 to 7.2% at the end of 2013-14," it added.

A report by the Prime Minister’s Economic Advisory Council released last month said wholesale price inflation would be 5.5% by the end of March. “A good performance in agriculture will have a moderating effect on food inflation while depreciation of the rupee may increase pressure," the report said.

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Published: 14 Oct 2013, 12:38 PM IST
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