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Inflation rate rises to 8.43% in Dec, may hurt growth prospects

Inflation rate rises to 8.43% in Dec, may hurt growth prospects

New Delhi: Wholesale price inflation in December was 8.43%, almost a percentage point higher than the previous month, setting the stage for further rate increases by the central bank, which could slow down the pace of economic growth next fiscal.

Economists expect the Reserve Bank of India (RBI) to continue increasing interest rates to combat inflation, which, in turn, is expected to increase the cost of capital for companies and act as a drag on growth.

Sonal Varma, economist at Nomura Financial Advisory and Securities (India) Pvt. Ltd, in a research report marked down economic growth for fiscal 2012 on account of the lagged impact of hardening interest rates.

“We expect 100 bps (basis points) of further rate hikes by March 2012," Varma said. RBI has already increased policy rates six times since April.

The result of rate increases, along with other negative factors, would result in economic growth of 8% in fiscal 2010 compared with 8.7% in the current fiscal, Varma forecast.

More than just the sequential increase in December’s inflation, as measured by the Wholesale Price Index (WPI), the underlying structural and cyclical factors exerting upward pressure on price levels is expected to adversely affect growth prospects.

For instance, on Friday, the government’s inflation data showed the provisional WPI-based inflation of 8.58% for October had been revised upwards to 9.12%.

According to Varma, the inflation pulse measure (three-month inflation average adjusted for seasonal factors) has turned up from 2.5% in August to 6.3% in November.

The structural factors such as supply constraints in food production, along with a rise globally in commodity prices, are expected to keep inflation at elevated levels in the near future.

“This (food inflation), coupled with higher oil prices, is likely to result in inflation being sticky at 6.5%-7% in FY12, with an upward bias," economists Rohini Malkani and Anushka Shah of Citigroup Inc. said in a report.

A break-up of December’s data showed inflation in food articles was 13.55%, led primarily by protein-rich food items such as milk and eggs, and also vegetables and fruits. The price level of onions in December rose by 45.82%.

“Food inflation at this level is not acceptable and we are trying our best to control it along with the cooperation of state governments," finance minister Pranab Mukherjee said.

He said he would be meeting state finance ministers on 19 January to discuss, among other issues, rising prices.

The central bank is scheduled to announce its quarterly monetary policy statement on 25 January.

Containing inflation is a challenge, and RBI will take appropriate action as and when required, Mukherjee said.

Economists expect the central bank to meet the challenge by tightening rates. RBI will increase rates by 75 bps (each basis point is one-hundredth of a percentage point) in 2011, forecast Citigroup’s Malkani and Shah.

PTI and Bloomberg contributed to this story

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