Conflicting rationale before Reserve Bank

WPI inflation in Dec at 3-year low but CPI counterpart at new high food inflation stays high in both, so rate cut expectations mixed

The consumer and wholesale price inflation numbers for December 2012 gave contrasting pictures, just a fortnight ahead of the Reserve Bank of India (RBI)’s monetary policy review.

Retail price inflation again entered double digits, to touch a record of 10.56 per cent against 9.9 per cent in November. Wholesale price inflation, on the other hand, fell to a three-year low of 7.18 per cent in December from 7.24 per cent in the previous month. Consumer price inflation, starting to come down from January 2012, was higher at 10.74 per cent in the rural parts than 10.42 per cent in urban areas.

The contrasting picture is not so surprising, given that food articles have a higher weight in the consumer price index (CPI, base 2010) than the wholesale price index (WPI, base 2004-05) and it is this part of the rate of price rise that showed acceleration. Food articles have 49.71 per cent weight in the CPI and 24.31 per cent in the WPI,14.34 per cent in primary articles (non-processed) and 9.97 in manufactured items (processed ones).

Consumer price food inflation rose to 13.04 per cent in December from 11.81 per cent in the previous month. Food inflation was in double digits in the WPI as well at 11.16 per cent, compared to 8.5 per cent in the previous month. In other words, a sharp rise in food inflation whichever index one takes. Most of the rise was witnessed from vegetables, as inflation in these articles rose to 13.25 per cent in December from deflation of 1.19 per cent in the previous month. In the CPI inflation in these articles went up to 25.71 per cent in December against 14.71 per cent in November.

However, the rate of price rise in manufactured items was down to 5.04 per cent from 5.41 per cent. In fact, food (processed items) inflation also declined in this category to nine per cent from 9.97 per cent.

From the point of view of RBI, core (manufactured items sans food products) inflation holds importance. It was down to a 33-month low, to 4.19 per cent in December from 4.49 per cent in November. Over the past two months, core inflation remained below its long-term (seven years) average of 4.7 per cent, an analysis by YES Bank showed. It is this part of inflation that has given experts confidence that RBI will go for a rate cut in its January 29 monetary review.

“We expect RBI to cut the repo rate by 50 basis points (bps) in the fourth quarter, with a 25 bps cut in the policy review later this month,” said YES Bank chief economist Shubhada Rao. However, Deloitte senior economist Anis Chakravarty said RBI would also consider the CPI’s spurt in food inflation. “There are expectations of a 25 bps cut. However, concerns remain on the retail side, led by the food numbers which have crossed the 10 per cent mark. This is going to be an important factor for RBI to consider,” he said.

Growth numbers have not shown aclear picture. While industrial production grew 8.3 per cent in October, giving hopes on economic recovery, it contracted 0.1 per cent in November. Not surprising, though, as it has been so for a number of years; pre-Diwali figures see a rise in industrial growth and a post-Diwali month witnesses slower production activity.

Economic growth declined to 5.4 per cent in the first half of this financial year, from 7.3 per cent in the corresponding period of 2011-12. The finance ministry expects the economy to grow by 5.7-5.9 per cent in all of 2012-13, which requires the economy to expand in the range of 6.1-6.3 per cent in the second half.