Economists say inflation has bottomed out, will decline

Headline inflation, which jumped to a 14-month high in November at 7.52%, has likely bottomed out and may decline from the next month because of seasonal factors reducing the supply-side pressures, say economists.

Wholesale price-based inflation accelerated to 14-month high in November on account of surge in food prices.

Vegetable prices shot up by 95.25% in November compared to 78.38% in the previous month.

"The seasonality factor will help in reversing the trend in WPI. In December, we will see some easing. We are not going to see inflation climbing to 7.72 or higher next month," Sunil Kumar Sinha, public finance director at India Ratings, said.

Echoing his views, Axis Bank chief economist Saugata Bhattacharya said, "Increase in supply of fruits and vegetables is likely to moderate inflation going forward."

WPI has been accelerating since May this year after easing to 41-month low of 4.70%.

Sinha, however, believes the respite will be temporary as seasonal factors will start waning after two-three months.

"Seasonal factors are going to have limited impact unless structural factors are resolved," Sinha said.

HSBC in a note today said while food inflation may ease in coming months as supply conditions improve, underlying inflation is susceptible to upside risks as inflation expectations are sticky and may continue to drift up.

Last week the government data had showed that retail inflation, or consumer price index (CPI) also jumped to a nine-month high at 11.24% in November.

Economists believe higher WPI and CPI are likely to force the Reserve Bank to increase interest rates by at least 25 basis points in the December 18 monetary policy review.

However, Bhattacharya believes that the probability of a 25 basis point rate hike is more, but "a 50 basis point rate hike is not off the table".

Any hike in this policy review would be the third consecutive time RBI would be raising rates to tame inflation.

Brokerage house Nomura said from a monetary policy perspective, the focus is shifting away from WPI towards CPI inflation. "We expect a 25 basis point repo rate hike to 8% on December 18 followed by another 25 basis point hike to 8.25% in Q1 2014," it said.

Nomura said even as a reversal in vegetable prices should lower CPI inflation in coming months, it does not expect CPI inflation to fall below 9% on a sustained basis and thus interest rates should remain higher for longer.